Discussion Papers

Christian Growitsch, J. Scott Marcus, Christian Wernick

The effects of lower Mobile Termination Rates (MTRs) on mobile retail price and demand

No. 345 / September 2010

Summary

A number of initiatives are under way that will either greatly lower Mobile Termination Rates (MTRs) or else eliminate them altogether. The European Commission’s goal is to achieve a better harmonisation of MTRs among the Member States. A key additional policy basis for these initiatives is the expectation that lower MTRs would lead to lower retail unit prices for most end-users, and that these lower retail unit prices would in turn lead to higher average consumption of mobile services per user and to a reduction of Deadweight Loss.

There are strong theoretical grounds to believe that lower MTRs would lead to lower usage-based retail unit prices; however, the same literature also leads us to expect that the decrease in the retail unit price might be less than the decrease in the MTR, a phenomenon known as the "waterbed effect". Meanwhile, some experts argue that MNOs would compensate for lower wholesale termination revenues by increasing retail unit prices. The net effect on retail unit price is thus a complex empirical question that depends on the balance between several different and conflicting factors.

In this report, we use econometric methods to study the impact of MTRs on retail prices and demand from 2003 to 2008 for 61 MNOs from 16 European Member States, all of which employ a Calling Party’s Network Pays (CPNP) wholesale regime. Our primary data sources are BEREC/ERG data on MTRs, and the Merrill Lynch Global Wireless Matrix. The analysis is technically challenging for many reasons. With that in mind, we have made a concerted effort to use independent sources, especially country-specific data from national regulators (e.g. from Spain and the UK), as a cross-check not only on our data sources, but also on our overall findings and conclusions.

We have two major findings, both of which have high statistical significance:

  • We have shown that lower MTRs tend to result in a lower average retail unit price, with a highly significant coefficient of +0.71. That the coefficient is less than +1.0 tends to confirm the existence of a waterbed effect.
     
  • Our results also demonstrate that lower MTRs (presumably operating through the mechanism of lower retail prices) lead to increased mobile call initiation in terms of minutes of use per month per subscription. Long term elasticity (in the range of -0.52 to -0.61) is much greater than short term elasticity (-0.097).

The overall policy implication, in our view, is that efforts to drive MTRs to lower levels are appropriate and will tend to increase consumer welfare.

Full version only available in German language.

Discussion Paper is available for download.

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