Regulating termination charges in asymmetric oligopolies

This paper extends a standard Hotelling model to three firms and analyzes the competitive effect of asymmetric regulation on mobile and fixed termination charges. In the presence of fixed-mobile substitution, above-cost mobile termination charge creates a trade-off on the mobile network’s profit: i.e., (i) reducing retail profit by strengthening competition for subscribers (“price competition effect”), and (ii) raising termination profit by increasing market shares (“market share effect”). Our analysis shows that the competitive effect of asymmetric regulation on mobile and fixed termination charges is decided by the interaction between these two effects, which in turn depends on the distribution of customer types. That is, above-cost termination charges are likely to be beneficial to consumers for a sufficiently large fixed-mobile type (i.e., customers choosing between mobile and fixed networks) compared to a mobile type (i.e., customers choosing between mobile networks), while they are likely to be harmful to consumers for a small fixed-mobile type. It would be an important implication for regulatory authorities that there exist various factors to consider in regulating termination charges, including the industry development and market structure.