Discussion Papers

Alexander Kohlstedt

Neuere Theoriebeiträge zur Netzökonomie: Zweiseitige Märkte und On-net/Off-net-Tariffdifferenzierung

Nr. 278 / August 2006

Summary

The pricing of termination charges in the mobile industry continues to pose challenges to the regulatory community. The insufficient cost orientation of these fees, and the different charges for mobile-to-mobile termination on the one hand and fixed-to-mobile termination on the other hand, are hot topics both in the academic and regulatory debate. These concerns have led to frequent calls for stronger ex ante regulation of mobile termination charges.

In this paper, we seek to determine the degree to which the further regulation of mobile termination fees is justified, in light of the economic structures and characteristics of the mobile industry. To answer this question, we will analyze the latest papers published in the area of network economics, especially on the regulation of retail and wholesale services in the mobile industry.

In particular, we will evaluate the theory of "two-sided markets" in detail in conjunction with termination fees, as mobile termination markets present a typical example for multi-sided markets. The origin of two-sided markets analyses is the existence of indirect network externalities and non-neutral pricing structures on markets. Such network externalities can lead to misinterpretations if the two market sides are viewed in isolation from one another. The answers to competition policy questions on two-sided markets can often be different than those on one-sided markets without network effects. In the scope of this analysis, one must also question whether the Calling Party Pays billing arrangement corresponds to an appropriate allocation of benefits for telephone calls, especially when positive call externalities are considered.

Reductions in termination charges caused by regulatory intervention also influences other markets. The "waterbed effect" plays an important role in determining the magnitude of these effects. The waterbed effect means that changing the level of mobile termination charges will cause changes of the prices of other mobile retail services, e.g. calls prices or the price of the mobile handset. The mechanism and the effectiveness of the waterbed effect will be analyzed in detail in this study.

We also draw the attention to the distinction between on-net and off-net tariffs, and consider the implications of their use as a competitive instrument in the mobile market. The common valuation of this instrument in competition policy as well as its applicability for small and large mobile network operators will be questioned in the face of latest analyses. [Full text available in German only]

Diskussion Paper is available for download.

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