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Testing the "waterbed" effect in mobile telephony

  • Christos Genakos
  • Tommaso Valletti

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.

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File URL: http://eprints.lse.ac.uk/19680/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 19680.

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Length: 49 pages
Date of creation: Oct 2007
Date of revision:
Handle: RePEc:ehl:lserod:19680
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Web page: http://www.lse.ac.uk/

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