Testing the 'Waterbed' Effect in Mobile Telephony

68 Pages Posted: 11 Jan 2010

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)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2009

Abstract

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 although regulation reduced termination rates by about 10%, this also led to a 5% increase in mobile retail prices. We also provide evidence that both competition and market saturation, and most importantly their interaction, affect the overall impact of the waterbed effect on prices.

Keywords: regulation, telephony, termination rates

JEL Classification: L4, L9

Suggested Citation

Genakos, Christos and Valletti, Tommaso M., Testing the 'Waterbed' Effect in Mobile Telephony (December 2009). CEPR Discussion Paper No. DP7611. Available at SSRN: https://ssrn.com/abstract=1533215

Christos Genakos (Contact Author)

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

Imperial College Business School ( email )

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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