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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 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 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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Suggested Citation

  • Christos Genakos & Tommaso Valletti, 2011. "Testing The “Waterbed” Effect In Mobile Telephony," Journal of the European Economic Association, European Economic Association, vol. 9(6), pages 1114-1142, December.
  • Handle: RePEc:bla:jeurec:v:9:y:2011:i:6:p:1114-1142 DOI: j.1542-4774.2011.01040.x
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    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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