Telecoms regulators can now be confident that their market interventions to reduce mobile operators” prices for connecting calls – so-called termination charges – will benefit consumers. That is the central conclusion of research by Christos Genakos and Tommaso Valletti, published in the August 2015 issue of the Economic Journal.
An earlier study by these economists detected a ”waterbed” effect, in which price caps on termination charges led to significant price increases for mobile phone subscribers. But with mobile penetration very high these days and mobile-to-mobile traffic far exceeding fixed-to-mobile traffic, the new study finds that regulators should no longer worry about possibly adverse consequences of regulatory cuts on what customers end up paying. Nor is there any strong indication that cuts have weakened mobile operators” ability to compete by making new investments.
Despite vigorous competition and the impressive growth of mobile telecoms markets over the last two decades, regulators have been constantly concerned about the prices that mobile operators charge other network operators (fixed or mobile) for connecting calls to their subscribers.
Since the early 2000s, regulators in Europe and worldwide have repeatedly intervened to cut these termination charges with the aim of improving competition and reducing prices to final consumers. But both researchers and mobile operators have argued that reducing the level of termination rates can potentially increase, not decrease, the level of prices for mobile subscribers – what has become known as the waterbed effect.
In an earlier (2011) study, which analysed data for the period from 2002 to 2006, Genakos and Valletti showed that, indeed, countries that introduced regulation that cut the termination rates caused a significant waterbed effect: a 10% reduction in mobile termination rates led to a 5% increase in mobile retail prices, varying between 2%-15% depending on the estimate.
But at the same time, the telecoms market was undergoing a fundamental change. While in the early years, most calls to mobile phones would be made from fixed lines, more recently mobile voice traffic has overtaken fixed line call volumes, changing the economic forces that give rise to the waterbed effect.
The new study summarises theoretical arguments related to the underlying changes in mobile-to-mobile and fixed-to-mobile traffic volumes, and empirically revisits the earlier analysis, using an extended dataset covering 27 countries for the period from 2002 until 2012.
The new results demonstrate that on average across the whole sample the waterbed effect is no longer present. Delving deeper into the possible channels, the researchers uncover, in line with theory, that the distinguishing feature for this change is the importance of calls made from and to mobile phones relative to calls made to mobile phones from fixed lines.
The ratio of mobile traffic to fixed traffic is key in the findings. Countries that introduced termination rate regulation when mobile traffic was high did not experience any waterbed effect.
In contrast, countries that introduced the same regulation at a time of low mobile traffic compared with traffic received from fixed networks, experienced the waterbed effect overall: retail prices first increased substantially, as Genakos and Valletti found in their 2011 study, but then this effect considerably decreased over time due to the growing importance of mobile-to-mobile traffic.
Finally, the new study finds no evidence that profits of mobile operators have been affected by regulatory cuts in termination rates. But the data are considerably noisier and these results on profits should therefore be taken with caution. It is possible that regulation did have a negative effect on profits, but the data do not capture the fact that mobile operators have also been effective at reducing their cost base.
The new results have important policy consequences. The fact that mobile penetration nowadays is very high in most developed countries, and that mobile-to-mobile traffic far exceeds fixed-to-mobile traffic volumes, means that regulators should now be less worried about possibly adverse or unintended short-run consequences of regulatory cuts to mobile termination charges.
The absence of the waterbed effect, instead, now implies that further termination charges cuts will decrease the price of calls to mobile phones, which will benefit consumers. Nor is there any strong indication that these cuts have weakened the mobile operators” position to survive or to compete by making new investments.
”Evaluating a Decade of Mobile Termination Rate Regulation” by Christos Genakos and Tommaso Valletti is published in the August 2015 issue of the Economic Journal. Their 2011 study – ”Testing the “Waterbed” Effect in Mobile Telecommunications” – was published in the Journal of the European Economic Association. It is summarised in the Centre for Economic Performance magazine CentrePiece here: http://cep.lse.ac.uk/pubs/download/cp238.pdf Christos Genakos is at the Athens University of Economics and Business. Tommaso Valletti is at Imperial College London.
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