Testing the "Waterbed" Effect in Mobile Telephony
AbstractThis paper examines the impact of regulatory intervention to cut termination rates of calls from fixed lines to mobile phones. Under quite general conditions of competition, theory suggests that lower termination charges will result in higher prices for mobile subscribers, a phenomenon known as the "waterbed" effect. The waterbed effect has long been hypothesized as a feature of many two-sided markets and especially the mobile network industry. Using a uniquely constructed panel of mobile operators' prices and profit margins across more than twenty countries over six years, we document empirically the existence and magnitude 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 importantly their interaction, affect the overall impact of the waterbed effect on prices.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0827.
Date of creation: Oct 2007
Date of revision:
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
telecommunications; regulation; Waterbed effect; two-sided markets;
Other versions of this item:
- Christos Genakos & Tommaso Valletti, 2008. "Testing the “Waterbed” Effect in Mobile Telephony," CEIS Research Paper 110, Tor Vergata University, CEIS, revised 11 Jul 2008.
- Genakos, Christos D. & Valletti, Tommaso, 2009. "Testing the "Waterbed" Effect in Mobile Telephony," CEPR Discussion Papers 7611, C.E.P.R. Discussion Papers.
- Christos Genakos & Tommaso Valletti, 2007. "Testing the "waterbed" effect in mobile telephony," LSE Research Online Documents on Economics 19680, London School of Economics and Political Science, LSE Library.
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-12-15 (All new papers)
- NEP-COM-2007-12-15 (Industrial Competition)
- NEP-MIC-2007-12-15 (Microeconomics)
- NEP-MKT-2007-12-15 (Marketing)
- NEP-NET-2007-12-15 (Network Economics)
- NEP-REG-2007-12-15 (Regulation)
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