Discussion Papers

No. 408: Welfare Implications of Pure LRIC Regulation of Termination Rates
Authors: Tseveen Gantumur, Iris Henseler-Unger, Karl-Heinz Neumann
May 2016

(Full Version only available in German language)

Summary

The termination market of the EU countries is characterized in that the termination service forms its own monopoly market and potential buying power plays a relatively minor role. In light of the structural peculiarities of the termination market, an empirical core issue arises of whether the previous, regulatory induced decline in mobile termination rates (MTRs) and the implementation of the pure LRIC cost approach (LRIC) has caused an increase in the actual demand in the EU mobile markets. Driven by different incentive structures of the affected telecommunication networks, the present study deals with a quantitative analysis of selected EU countries through investigating the specific questions to whether and to what extent the reductions in MTRs may affect the distribution effects within the mobile networks as well as between fixed and mobile networks. 

For years, the decline in MTRs took place to a considerable extent and to varying degrees over time, and this also in the countries that have not or introduces later LRIC. The study shows that the decreasing MTRs and the implementation of the LRIC cost approach exercise distributional effects within the mobile networks as well as between fixed and mobile networks, but the overall effect in terms of voice calls demand levels remains virtually unchanged.  

With regard to the distributional effects, the analysis shows that, on the one hand, the on-net/off-net traffic imbalance is declining considerably during the time period of the implementation of LRIC. This is valid regardless of an applied cost approach. Apart from the reduction of the MTRs as a whole and the introduction of LRIC in particular, the present market structure and the existence of more symmetrical market shares of mobile network operators play an important role for the shift to the traffic equilibrium. On the other hand, the quantitative findings show that – on contrary to the claim that lower termination charges and the MTRs set on pure LRIC can slow down the substitution of fixed by mobile services, – the countries with the use of LRIC the fixed-to-mobile substitution is strongly pronounced both before and after the introduction of LRIC. This is consistent with the further findings that the network externalities caused by on-net/off-net differences still persist, although to a lesser extent than ever before. Finally, the early findings at an aggregate level point to a statistically significant linkage between the decrease of MTRs and the increase of the post-paid subscribers, but only weak impact of the MTRs’ decline on the overall use of mobile voice calls. The later can be attributed to a maturity of the mobile voice markets in the EU countries.  

Concerning the competitive behavior can be stated, that, firstly, the increase in the off-net traffic due to the MTR cuts result in an increased substitutability of mobile networks and thus may lead to a reduction of market power of the individual mobile networks. Secondly, in order to reduce the potential of adverse effects on the competition between fixed and mobile networks, the development of complementary fixed and mobile services as well as incumbency advantages seems to be essential in alongside with the MTRs’ reductions.  

The findings in this study should be subjected furthermore to an investigation of their statistical significance within a framework of econometric analysis, once relevant data allows it. 

Discussion Paper is available for download.

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