Discussion Papers

Scott Marcus, Lorenz Nett, Ulrich Stumpf, Christian Wernick

Competitive Implications of On-Net/Off-Net Price Differentiation

No. 329 / December 2009

Summary

Throughout the European Union, price discrimination between on-net calls (calls where the recipient is a customer of the same network as the customer who placed the call) and off-net calls (where this is not the case) is widespread. This research paper considers the welfare implications of on-net off-net price discrimination, and the regulatory and policy measures that have been tried or that could be employed going forward in order to ameliorate any competitive harms.

Regulatory and policy concerns have largely centred on the mobile market. On-net off-net price discrimination is a phenomenon at the retail level, but its manifestation in the mobile sector depends critically on the level of wholesale termination payments. It is clear that a large fraction of calls from a small mobile operator are likely to be off-net. For each of these off-net calls, the mobile termination rate (MTR) is a real cost, and thus sets an effective floor on the price that is likely to be charged at retail. To the extent that these MTRs are greatly in excess of real incremental costs (as is still largely the case throughout Europe today), they prevent small mobile operators from pricing efficiently at retail, and in particular limit the ability of small mobile operators to compete with larger mobile operators on the basis of price.

With this in mind, there are two obvious possible ways to address the apparent problem. One could either seek to control retail prices directly, or one could seek to reduce or eliminate the high wholesale MTRs on which anticompetitive on-net off-net price discrimination critically depends. There is good reason to believe that the substantial reduction of MTRs to levels corresponding to true long range incremental cost would be sufficient to deal with any problems. In Member States with low MTRs, or in countries where MTRs are altogether absent, on-net off-net price discrimination manifests itself quite differently than in most European Member States today.

Recently, the European Commission has issued a Recommendation that would reduce MTRs from current levels of some € 0.08 per minute to just € 0.015 to € 0.03 by 2012; further, the ERG has argued in favour of implementing Bill and Keep, and thus eliminating MTRs altogether. Either of these actions is likely to greatly mitigate any problems with anticompetitive on-net off-net price discrimination, and the Commission’s Guidelines are already in place; thus, we see no need for additional action at this time.

(Full version only available in German language)

Discussion Paper is available for download.

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