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Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)

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  • Harbord, David
  • Hoernig, Steffen

Abstract

This paper presents results from a calibrated welfare model of the UK mobile telephony market which includes many mobile networks; calls to and from the fixed network; networkbased price discrimination; and call externalities. The analysis focuses on the short-run effects of adopting lower mobile termination rates (MTRs) on total welfare, consumer surplus and profits. Our simulations show that reducing MTRs broadly in line with the recent European Commission Recommendation to either "long-run incremental cost"; reciprocal termination charges with fixed networks; or "bill-and-keep" (i.e. zero termination rates), increases social welfare, consumer surplus and networks’ profits. Depending on the strength of call externalities, social welfare may increase by as much as £360 million to £2.5 billion per year. The analysis thus lends support to a move away from fully-allocated cost pricing and towards much lower MTRs, with bill-and-keep frequently leading to the highest increase in welfare when call externalities matter. We also apply the model to estimate the welfare effects of the recently-approved merger between Orange and T-Mobile under two different scenarios concerning MTRs.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7730.

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Date of creation: Mar 2010
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Handle: RePEc:cpr:ceprdp:7730

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Keywords: mobile termination rates; network effects; regulation; simulations; telecommunications; welfare;

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References

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  1. Luís Cabral, 2011. "Dynamic Price Competition with Network Effects," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 83-111.
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Citations

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Cited by:
  1. Sjaak Hurkens & Ángel Luis López, 2011. "The Welfare Effects of Mobile Termination Rate Regulation in Asymmetric Oligopolies: the Case of Spain," Working Papers 11-09, NET Institute.
  2. Genakos, Christos & Valletti, Tommaso, 2011. "Seesaw in the air: Interconnection regulation and the structure of mobile tariffs," Information Economics and Policy, Elsevier, vol. 23(2), pages 159-170, June.
  3. Lee, Jongyong & Lee, Duk Hee, 2012. "Asymmetry of mobile termination rates and the waterbed effect," 23rd European Regional ITS Conference, Vienna 2012 60353, International Telecommunications Society (ITS).
  4. Hoernig, Steffen, 2010. "Competition Between Multiple Asymmetric Networks: Theory and Applications," CEPR Discussion Papers 8060, C.E.P.R. Discussion Papers.
  5. Sjaak Hurkens & Angel L. López, 2014. "Who should pay for two-way interconnection?," Working Papers 774, Barcelona Graduate School of Economics.
  6. Torben Stühmeier, 2013. "Access regulation with asymmetric termination costs," Journal of Regulatory Economics, Springer, vol. 43(1), pages 60-89, January.
  7. Stühmeier, Torben, 2010. "Fixed to VoIP Interconnection: Regulation with Asymmetric Termination Costs," 21st European Regional ITS Conference, Copenhagen 2010: Telecommunications at new crossroads - Changing value configurations, user roles, and regulation 34, International Telecommunications Society (ITS).

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