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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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Author Info

  • 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. Armstrong, Mark & Wright, Julian, 2007. "Mobile call termination in the UK," MPRA Paper 2344, University Library of Munich, Germany.
  2. Luis Cabral, 2007. "Dynamic Price Competition with Network Effects," 2007 Meeting Papers 326, Society for Economic Dynamics.
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  9. Gans, J.S. & King, S.P., 2000. "Using 'Bill and Keep' Interconnect Arrangements to Soften Network Competiti on," Department of Economics - Working Papers Series 739, The University of Melbourne.
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Citations

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Cited by:
  1. Stühmeier, Torben, 2011. "Access regulation with asymmetric termination costs," DICE Discussion Papers 29, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Christos Genakos & Tommaso Valletti, 2011. "Seesaw in the Air: Interconnection Regulation and the Structure of Mobile Tariffs," CEP Discussion Papers dp1045, Centre for Economic Performance, LSE.
  3. 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).
  4. Hoernig, Steffen, 2014. "Competition between multiple asymmetric networks: Theory and applications," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 57-69.
  5. 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).
  6. 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.

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