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Testing the "Waterbed" Effect in Mobile Telephony

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  • Christos Genakos
  • Tommaso Valletti

Abstract

This 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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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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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: telecommunications; regulation; Waterbed effect; two-sided markets;

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