Mobile Termination and Consumer Expectations under the Receiver-Pays Regime

We analyze how termination charges affect retail prices when taking into account that receivers derive some utility from a call and when firms may charge consumers for receiving calls. We assume that consumers form expectations about network sizes in a passive, but ex-post rational way. We show that RPP enlarges the set of equilibria compared to CPP. For a given termination charge and inelastic subscription demand, RPP allows firms to obtain higher profits at the expense of consumers. Socially optimal termination charges are below cost and lower under CPP than under RPP. We also analyze elastic subscription demand. Total surplus, consumer surplus, and market penetration are all maximized by the same positive but below cost termination charge. Firms’ profits typically increase when the termination charged is removed away from the socially optimal one, in either direction.