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Testing the "waterbed" effect in mobile telephony

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  • Genakos, Christos
  • Valletti, Tommaso

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 network 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.

Suggested Citation

  • Genakos, Christos & Valletti, Tommaso, 2007. "Testing the "waterbed" effect in mobile telephony," LSE Research Online Documents on Economics 19680, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:19680
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    File URL: http://eprints.lse.ac.uk/19680/
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    More about this item

    Keywords

    telecommunications; regulation; Waterbed effect; two-sided markets;
    All these keywords.

    JEL classification:

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

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