Price caps on termination charges have led to significant price increases for mobile phone subscribers

T he prices that mobile operators charge other network operators (fixed or mobile) for connecting calls to their subscribers – socalled termination charges – have become a hotly debated issue among regulators and academics worldwide. The level of these charges is perceived to be high both in absolute terms, but also in relation to similar prices charged by fixed network operators. Industry analysts argue that such charges may inhibit the future growth of telecoms services. What’s more, especially for fixed-to-mobile termination rates, a large body of theoretical research in economics has demonstrated that independently of the intensity of competition for mobile customers, mobile operators have an incentive to set charges that will extract the largest possible surplus from fixed users. This problem has provided the justification for regulatory intervention to cut termination rates. But reducing the level of charges can potentially increase the level of prices for mobile subscribers. This is what is known as the ‘waterbed’ effect, where pressing down prices in one part of firms’ operations causes another set of prices to rise. Understanding and quantifying the effect – as our research aims to do – is critical for assessing consumer benefits from mobile termination regulation.