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Testing the "Waterbed" Effect in Mobile Telephony

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  • Genakos, Christos D.
  • Valletti, Tommaso

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 telephony 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 although regulation reduced termination rates by about 10%, this also led to a 5% increase in mobile retail prices. We also provide evidence that both competition and market saturation, and most importantly their interaction, affect the overall impact of the waterbed effect on prices.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7611.

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Date of creation: Dec 2009
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Handle: RePEc:cpr:ceprdp:7611

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Keywords: regulation; telephony; termination rates;

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  1. Tomaso Duso, 2005. "Lobbying and regulation in a political economy: Evidence from the U.S. cellular industry," Public Choice, Springer, vol. 122(3), pages 251-276, March.
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  8. Wright, Julian, 2002. "Access Pricing under Competition: An Application to Cellular Networks," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 289-315, September.
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  15. repec:rje:randje:v:37:y:2006:3:p:668-691 is not listed on IDEAS
  16. 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.
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  18. Armstrong, M., 1996. "Network interconnection," Discussion Paper Series In Economics And Econometrics 9625, Economics Division, School of Social Sciences, University of Southampton.
  19. Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 483-512.
  20. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  21. Jullien, Bruno & Rey, Patrick & Sand-Zantman, Wilfried, 2009. "Termination fees revisited," IDEI Working Papers 551, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2012.
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