Seesaw in the Air: Interconnection Regulation and the Structure of Mobile Tariffs

30 Pages Posted: 5 Oct 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)

Date Written: August 5, 2010

Abstract

Interconnection rates are a key variable in telecommunications markets. Every call that is placed must be terminated by the network of the receiving party, thus the termination end has the characteristic of an economic bottleneck and is subject to regulation in many countries. This paper examines the impact of regulatory intervention to cut termination rates of calls to mobile phones. We argue that regulatory cuts should have a differential impact according to the type of tariff the mobile customer subscribes to. While all mobile customers may suffer because of a “waterbed” effect, termination rates also affect competition among mobile operators. We show that the waterbed effect is diluted, but not eliminated, for customers with pre-paid cards, where regulation also acts as impediment to “raise-each-other’s-cost” collusive strategies that mobile networks can adopt. The waterbed effect is instead strongest for consumers with post-paid subscription contracts.

Keywords: Interconnection, Network Competition, Regulation, Mobile Phones

JEL Classification: L13, L51

Suggested Citation

Genakos, Christos and Valletti, Tommaso M., Seesaw in the Air: Interconnection Regulation and the Structure of Mobile Tariffs (August 5, 2010). Available at SSRN: https://ssrn.com/abstract=1687814 or http://dx.doi.org/10.2139/ssrn.1687814

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)

London
United Kingdom

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