Testing the 'Waterbed' Effect in Mobile Telephony

55 Pages Posted: 3 Apr 2008

See all articles by Christos Genakos

Christos Genakos

Cambridge University; Centre for Economic Performance (CEP)

Tommaso M. Valletti

Imperial College Business School; Centre for Economic Policy Research (CEPR)

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Date Written: January 2008


This paper examines the impact of regulatory intervention to cut termination rates of calls from fixed lines to mobile phones. Under quite general conditions of competition, theory suggests that lower termination charges will result in higher prices for mobile subscribers, a phenomenon known as the "waterbed" effect. The waterbed effect has long been hypothesized as a feature of many two-sided markets and especially the mobile telephony industry. Using a uniquely constructed panel of mobile operators' prices and profit margins across more than twenty countries over six years, we document empirically the existence and magnitude of this effect. Our results suggest that the waterbed effect is strong, but not full. We also provide evidence that both competition and market saturation, but most importantly their interaction, affect the overall impact of the waterbed effect on prices.

Suggested Citation

Genakos, Christos and Valletti, Tommaso M., Testing the 'Waterbed' Effect in Mobile Telephony (January 2008). CEIS Working Paper No. 110, Available at SSRN: https://ssrn.com/abstract=1114856 or http://dx.doi.org/10.2139/ssrn.1114856

Christos Genakos

Cambridge University ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Tommaso M. Valletti (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR)

United Kingdom

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