Network Growth: Theory and Evidence from the Mobile Telephone Industry

27 Pages Posted: 18 Jul 2012

See all articles by Peter J. Alexander

Peter J. Alexander

Federal Communications Commission

Adam Candeub

Michigan State University - College of Law

Brendan Michael Cunningham

U.S. Naval Academy; Eastern Connecticut State University

Date Written: June 14, 2007

Abstract

Firms in mobile telephone markets charge one another for delivering calls to subscribers. These so-called termination charges are controversial from a policy perspective since they are fairly high and stable. We present a model of consumer and firm behavior in mobile markets in order to identify the role of termination charges in determining the market equilibrium. We analyze three segments of the mobile market: termination, calling, and subscribing. Our model predicts a “waterbed effect”, that is, high termination rates will be associated with low subscription prices, if preferences are the primary source of variation in termination rates. If costs are the main driver of termination rates our model predicts a “tide” hypothesis in which high termination rates exist alongside high subscription prices. We test these and other predictions from our model using international data on mobile subscriptions per person. We find results which are broadly consistent with our model. More specifically, we find evidence that mobile termination rates are positive and significantly related to mobile phone adoption. This result is robust to the inclusion of a variety of other structural, institutional, demographic, and income controls. We also find that competition, internet subscriptions, and a free press are positively associated with mobile phone adoption while fixed termination rates and inequality slow the adoption of mobile technologies.

Suggested Citation

Alexander, Peter J. and Candeub, Adam and Cunningham, Brendan Michael and Cunningham, Brendan Michael, Network Growth: Theory and Evidence from the Mobile Telephone Industry (June 14, 2007). TPRC 2007, Available at SSRN: https://ssrn.com/abstract=2111605

Peter J. Alexander (Contact Author)

Federal Communications Commission ( email )

Washington, DC 20554
United States

Adam Candeub

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

Brendan Michael Cunningham

Eastern Connecticut State University ( email )

Willimantic, CT 06226
United States

U.S. Naval Academy ( email )

Department of Economics
589 McNair Road
Annapolis, MD 21402
United States
410-293-6894 (Phone)
508-302-2596 (Fax)

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