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Testing the "Waterbed" Effect in Mobile Telephony

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Author Info
Christos Genakos
Tommaso Valletti

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Abstract

This paper examines the impact of regulatory intervention to cut termination rates of callsfrom fixed lines to mobile phones. Under quite general conditions of competition, theorysuggests that lower termination charges will result in higher prices for mobile subscribers, aphenomenon known as the "waterbed" effect. The waterbed effect has long beenhypothesized as a feature of many two-sided markets and especially the mobile networkindustry. Using a uniquely constructed panel of mobile operators' prices and profit marginsacross more than twenty countries over six years, we document empirically the existence andmagnitude of this effect. Our results suggest that the waterbed effect is strong, but not full.We also provide evidence that both competition and market saturation, but most importantlytheir interaction, affect the overall impact of the waterbed effect on prices.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0827.

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Date of creation: Oct 2007
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Handle: RePEc:cep:cepdps:dp0827

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Related research
Keywords: telecommunications regulation "Waterbed" effect two-sided markets

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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  1. Jean-Charles Rochet Author-Email: rochet@cict.fr Author-Workplace-Name: IDEI, University of Toulouse & Jean Tirole Author-Email: tirole@cict.fr Author-Workplace-Name: IDEI, University of Toulouse, 2006. "Two-Sided Markets: A Progress Report," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 645-667, Autumn.
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  2. Kaiser, Ulrich & Wright, Julian, 2006. "Price structure in two-sided markets: Evidence from the magazine industry," International Journal of Industrial Organization, Elsevier, vol. 24(1), pages 1-28, January. [Downloadable!] (restricted)
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  3. Mark Armstrong Author-Email: mark.armstrong@ucl.ac.uk, 2006. "Competition in Two-Sided Markets," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 668-691, Autumn.
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  4. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 249-275, February. [Downloadable!] (restricted)
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  5. Elena Argentesi & Lapo Filistrucchi, 2005. "Estimating market power in a two-sided market: the case of newspapers," Economics Working Papers ECO2005/07, European University Institute. [Downloadable!]
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  6. Audrey Laporte & Frank Windmeijer, 2005. "Estimation of Panel Data Models with Binary Indicators when Treatment Effects are not Constant over Time," Working Papers laporte-04-01, University of Toronto, Department of Economics. [Downloadable!]
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  7. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May. [Downloadable!] (restricted)
  8. Wright, Julian, 2002. "Access Pricing under Competition: An Application to Cellular Networks," Journal of Industrial Economics, Blackwell Publishing, vol. 50(3), pages 289-315, September. [Downloadable!] (restricted)
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