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Network growth: Theory and evidence from the mobile telephone industry

  • Cunningham, Brendan M.
  • Alexander, Peter J.
  • Candeub, Adam

Firms in mobile telephone markets place termination charges on one another for delivering calls to subscribers. We present a model of consumer and firm behavior in mobile markets in order to identify the role of termination charges in determining the market equilibrium. Our model predicts a "waterbed effect", that is, high termination rates will be associated with low subscription prices, if preferences are the primary source of variation in termination rates. If costs are the main driver of termination rates our model predicts a "tide" hypothesis in which high termination rates exist alongside high subscription prices. We test these and other predictions from our model using international data on mobile subscriptions per person. We find results which are broadly consistent with our model. More specifically, we find evidence that mobile termination rates are positive and significantly related to mobile phone adoption. This result is robust to the inclusion of a variety of other structural, institutional, demographic, and income controls. We also find that competition, internet subscriptions, and a free press are positively associated with mobile phone adoption while fixed termination rates and inequality slow the adoption of mobile technologies.

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Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 22 (2010)
Issue (Month): 1 (March)
Pages: 91-102

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Handle: RePEc:eee:iepoli:v:22:y:2010:i:1:p:91-102
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505549

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  1. Patrick Degraba, 2003. "Efficient Intercarrier Compensation for Competing Networks When Customers Share the Value of A Call," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(2), pages 207-230, 06.
  2. 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.
  3. Wright Julian, 2002. "Bill and Keep as the Efficient Interconnection Regime?," Review of Network Economics, De Gruyter, vol. 1(1), pages 1-7, March.
  4. Ingo Vogelsang, 2003. "Price Regulation of Access to Telecommunications Networks," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 830-862, September.
  5. Binmore, Ken & Harbord, David, 2005. "Bargaining Over Fixed-to-Mobile Termination Rates in the Shadow of the Regulator," MPRA Paper 3248, University Library of Munich, Germany.
  6. Calzada, Joan & Valletti, Tommaso, 2005. "Network Competition and Entry Deterrence," CEPR Discussion Papers 5381, C.E.P.R. Discussion Papers.
  7. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  8. Barnett, A H & Kaserman, David L, 1998. "The Simple Welfare Economics of Network Externalities and the Uneasy Case for Subscribership Subsidies," Journal of Regulatory Economics, Springer, vol. 13(3), pages 245-54, May.
  9. Degraba Patrick, 2002. "Bill and Keep as the Efficient Interconnection Regime?: A Reply," Review of Network Economics, De Gruyter, vol. 1(1), pages 1-5, March.
  10. Daniel Birke & G. Swann, 2006. "Network effects and the choice of mobile phone operator," Journal of Evolutionary Economics, Springer, vol. 16(1), pages 65-84, April.
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