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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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  • David Harbord
  • Steffen Hoernig

Abstract

We present a calibrated model of the UK mobile telephony market with four mobile networks; calls to and from the fixed network; network-based price discrimination; and call externalities. Our results show that reducing mobile termination rates broadly in line with the recent European Commission Recommendation to either "pure long-run incremental cost"; reciprocal termination charges with fixed networks; or "Bill & 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 £ 990 million to £ 4.5 billion per year, with Bill & Keep leading to the highest increase in welfare. We also apply the model to estimate the welfare effects of the 2010 merger between Orange and T-Mobile under different scenarios concerning MTRs, and predict that consumer surplus decreases strongly.

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Bibliographic Info

Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp571.

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Length: 48 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:unl:unlfep:wp571

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

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References

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  1. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
  2. Cabral, Luis, 2009. "Dynamic price competition with network effects," IESE Research Papers D/843, IESE Business School.
  3. Oliver Budzinski & Isabel Ruhmer, 2008. "Merger Simulation in Competition Policy: A Survey," MAGKS Papers on Economics 200807, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
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  25. Berger, Ulrich, 2005. "Bill-and-keep vs. cost-based access pricing revisited," Economics Letters, Elsevier, vol. 86(1), pages 107-112, January.
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Citations

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Cited by:
  1. 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.
  2. 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).
  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 & 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.
  6. Torben Stühmeier, 2013. "Access regulation with asymmetric termination costs," Journal of Regulatory Economics, Springer, vol. 43(1), pages 60-89, January.

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