Seesaw in the air: Interconnection regulation and the structure of mobile tariffs

Interconnection rates are a key variable in telecommunications markets. Every call that is placed must be terminated by the network of the receiving party, thus the termination end has the characteristic of an economic bottleneck and is subject to regulation in many countries. This paper examines the impact of regulatory intervention to cut termination rates of calls to mobile phones. We argue that regulatory cuts should have a differential impact according to the type of tariff the mobile customer subscribes to. While all mobile customers may suffer because of a “waterbed” effect, termination rates also affect competition among mobile operators. We show that the waterbed effect is diluted, but not eliminated, for customers with pre-paid cards, where regulation also acts as impediment to “raise-each-other’s-cost” collusive strategies that mobile networks can adopt. The waterbed effect is instead strongest for consumers with post-paid subscription contracts. * We thank Steffen Hoernig, Jonathan Sandbach, the Associate Editor, two anonymous referees, and seminar audiences at Telecom ParisTech and the University of East Anglia for useful comments. All remaining errors are our own. 1 University of Cambridge & Centre for Economic Performance, London School of Economics, e-mail: [email protected], Web: http://www.sel.cam.ac.uk/personal/genakos 2 Imperial College London, University of Rome “Tor Vergata” & CEPR, e-mail: [email protected], Web: http://www3.imperial.ac.uk/people/t.valletti