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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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  • Hoernig, Steffen
  • Harbord, David

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.

Suggested Citation

  • Hoernig, Steffen & Harbord, David, 2010. "Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)," CEPR Discussion Papers 7730, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7730
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Torben Stühmeier, 2013. "Access regulation with asymmetric termination costs," Journal of Regulatory Economics, Springer, vol. 43(1), pages 60-89, January.
    2. Hoernig, Steffen, 2014. "Competition between multiple asymmetric networks: Theory and applications," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 57-69.
    3. Agostini, Claudio A. & Willington, Manuel & Lazcano, Raúl & Saavedra, Eduardo, 2017. "Predation and network based price discrimination in Chile," Telecommunications Policy, Elsevier, vol. 41(9), pages 781-791.
    4. 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.
    5. Vogelsang Ingo, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, De Gruyter, vol. 64(3), pages 193-270, December.
    6. Hurkens, Sjaak & López, Ángel L., 2012. "The welfare effects of mobile termination rate regulation in asymmetric oligopolies: The case of Spain," Telecommunications Policy, Elsevier, vol. 36(5), pages 369-381.
    7. Sjaak Hurkens & Angel L. Lopez, 2014. "Who Should Pay for Two-Way Interconnection?," Working Papers 774, Barcelona School of Economics.
    8. 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).
    9. Son, Pham Hai & Son, Le Hoang & Jha, Sudan & Kumar, Raghvendra & Chatterjee, Jyotir Moy, 2019. "Governing mobile Virtual Network Operators in developing countries," Utilities Policy, Elsevier, vol. 56(C), pages 169-180.
    10. 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).
    11. Tommaso Majer & Michele Pistollato, 2016. "Calling vs. Receiving Party Pays," Competition and Regulation in Network Industries, , vol. 17(2), pages 150-180, June.
    12. Claudio A. Agostini & Eduardo H. Saavedra & C. Manuel Willington, 2016. "Price Differentiation Between On-net And Off-net Calls: An Application To The Chilean Telephony Market," ILADES-UAH Working Papers inv313, Universidad Alberto Hurtado/School of Economics and Business.
    13. Baigorri, Carlos M. & Maldonado, Wilfredo F.L., 2014. "Optimal mobile termination rate: The Brazilian mobile market case," Telecommunications Policy, Elsevier, vol. 38(1), pages 86-95.
    14. Kryuchkova, Polina, 2013. "Regulation of prices for call termination to network telephone operator: antitrust or tariff regulation?," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, pages 126-142, December.

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    More about this item

    Keywords

    Mobile termination rates; Network effects; Regulation; Simulations; Telecommunications; Welfare;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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