Mobile Termination, Network Externalities, and Consumer Expectations

50 Pages Posted: 21 Apr 2010

See all articles by Sjaak Hurkens

Sjaak Hurkens

Institute for Economic Analysis-CSIC; Barcelona GSE

Angel Luis Lopez

Autonomous University of Barcelona; IESE Business School

Date Written: March 1, 2010

Abstract

We re-examine the literature on mobile termination in the presence of network externalities. Externalities arise when firms discriminate between on- and off-net calls or when subscription demand is elastic. This literature predicts that profit decreases and consumer surplus increases in termination charge in a neighborhood of termination cost. This creates a puzzle since in reality we see regulators worldwide pushing termination rates down while being opposed by network operators. We show that this puzzle is resolved when consumers' expectations are assumed passive but required to be fulfilled in equilibrium (as defined by Katz and Shapiro, AER 1985), instead of being rationally responsive to non-equilibrium prices, as assumed until now.

Keywords: Networks, Rational Expectations, Access Pricing, Interconnection, Regulation, Telecommunications

JEL Classification: D4, K23, L51, L96

Suggested Citation

Hurkens, J.P.M. (Sjaak) and Lopez, Angel Luis, Mobile Termination, Network Externalities, and Consumer Expectations (March 1, 2010). IESE Business School Working Paper No. 850, Available at SSRN: https://ssrn.com/abstract=1593598 or http://dx.doi.org/10.2139/ssrn.1593598

J.P.M. (Sjaak) Hurkens

Institute for Economic Analysis-CSIC

campus UAB
Bellaterra, 08193
Spain

Barcelona GSE ( email )

Barcelona
Spain
(34-93) 5806612 (Phone)
(34-93) 5801452 (Fax)

Angel Luis Lopez (Contact Author)

Autonomous University of Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain
34935811528 (Fax)

HOME PAGE: http://angelluislopez.net

IESE Business School

Avenida Pearson 21
Barcelona, 08034
Spain
+ 34 932534200 (ext. 4554) (Phone)

HOME PAGE: http://www.angelluislopez.net

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