Receiver benefits and strategic use of call externalities in mobile telephony markets

Recent models of network competition demonstrate the incentives for incumbent firms to reduce receiver benefits in an entrant's network through excessive off-net pricing. Theoretical reasoning behind the role of call externalities in limiting the market share of smaller networks assumes that receiving a call contributes to consumer utility. This paper tests this critical assumption with stated-preference data elicited from subscribers of mobile telephony in Poland. Our findings show that receiver benefits are a significant driver of mobile operator choice. Thus by reducing the volume of outgoing calls, larger networks can limit customer base growth of smaller rivals. Regulatory options for mitigating this effect are discussed. The size of market share gained by introducing a common off-net markup is low: 1.7–2.8% depending on the market segment. However under symmetric termination rates, an entrant would increase its market share by 6.1–8.5% at the expense of incumbents. In case of Poland, this would shorten the catch-up period from eight to five years.