Testing the 'Waterbed' Effect in Mobile Telephony

Journal of the European Economic Association (Vol. 9, Issue 6, pp. 1114-1142), 2011

45 Pages Posted: 19 Jan 2016

See all articles by Christos Genakos

Christos Genakos

Cambridge Judge Business School; Athens University of Economics and Business (AUEB); Center for Economic Policy Research (CEPR); Center for Economic Performance (CEP)

Tommaso M. Valletti

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

Date Written: December 1, 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: Waterbed effect, Regulation, Termination rates, mobile telephony

JEL Classification: D12, D43, L5, L96

Suggested Citation

Genakos, Christos and Valletti, Tommaso M., Testing the 'Waterbed' Effect in Mobile Telephony (December 1, 2009). Journal of the European Economic Association (Vol. 9, Issue 6, pp. 1114-1142), 2011. Available at SSRN: https://ssrn.com/abstract=2717944

Christos Genakos (Contact Author)

Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Athens University of Economics and Business (AUEB) ( email )

76 Patission Street
Athens, 104 34
Greece

HOME PAGE: http://www.aueb.gr/users/cgenakos

Center for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Center 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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