Subscribers to mobile telephone networks may lose out as a result of the May 2009 call by the European Commission for operators to slash their charges for completing calls. According to Professors Mark Armstrong and Julian Wright, whose research on so-called ''termination charges'' is published in the June 2009 Economic Journal, ultimately mobile operators may end up competing less aggressively for their customers.

On 7 May 2009, the European Commission issued its long awaited guidance on mobile operators'' wholesale termination rates: they are to be slashed by up to 70% by 2012. Termination charges are the wholesale rates the operators charge for completing calls on their networks. Operators denounced the measure, saying it would thwart investments without necessarily helping consumers. Deutsche Telekom, Europe''s biggest telecoms group, called the EU proposal incomprehensible.

The study by Professors Armstrong and Wright is therefore particularly timely. They try to solve a key puzzle surrounding mobile call termination: why would competing mobile operators want to charge each other high wholesale rates for completing each other''s calls? After all, these are just payments from one competitor to another. Shouldn''t they want to charge each other less than they charge fixed-line networks for completing calls on their networks?

Previous economic research has suggested this was indeed the case. It predicted that if they negotiate their termination charges, mobile operators would want to charge each other little or nothing. High termination charges make mobile operators compete more aggressively – for example, by offering free and subsidised handsets or paying customers to receive calls, as happened in 2006 when H3G in the UK announced that it would pay its subscribers 5 pence per minute for receiving calls.

On the other hand, for terminating calls from fixed-line networks, since the mobile operators'' termination revenues are obtained from fixed-line networks (or their customers) rather than each other, a separate body of economic research predicted that operators would set high monopoly-like termination charges if allowed.

Armstrong and Wright integrate these two research literatures. They note that a mobile operator cannot maintain a high termination charge to the fixed-line network together with a low termination charge to its rival mobile operators. If it did, the fixed network could then ''transit'' its calls via another mobile operator and so end up paying the lower mobile-to-mobile rate (plus a small transit charge).

As a result, mobile operators are forced to set (approximately) uniform termination charges for the two types of terminating traffic. Indeed, this is what is observed. Both types of calls are typically terminated at the same price.

Armstrong and Wright analyse the implications of this integrated framework, predicting that in the absence of regulation the resulting uniform termination charge will be set below the monopoly price although generally it will still be too high.

In other words, they show that their remains a rationale for regulation, albeit reduced. Their theory also explains why there is also no need to worry about operators charging each other too little for terminating each other''s calls (indeed they suspect no regulator has ever lost sleep over this prospect).

Still, they predict that reducing termination charges to very low levels – such as those in the EU''s guidance – may come at a cost to mobile subscribers since ultimately mobile operators may end up competing less aggressively for their customers.

''Mobile Call Termination'' by Mark Armstrong and Julian Wright is published in the June 2009 issue of the Economic Journal.