Competition in telecommunication networks with call externalities

This paper describes a model involving two interconnected networks offering different degrees of quality. In these networks, there are call externalities enabling consumers to assess the quality of the calls they send and receive. Networks compete in two-part tariffs. Our aim is to show that the “profit neutrality” result no longer applies due to network asymmetry and call externalities. In the case of non reciprocal access charges, call externalities generate private incentives enabling each competitor to charge low access prices. This reduces the risk of tacit collusion as competitors are free to negotiate their access charges.      

Mobile phone termination charges with asymmetric regulation

We model competition between two unregulated mobile phone companies with price-elastic demand and less than full market coverage. We also assume that there is a regulated full-coverage fixed network. In order to induce stronger competition, mobile companies could have an incentive to raise their reciprocal mobile-to-mobile access charges above the marginal costs of termination. Stronger competition leads to an increase of the mobiles’ market shares, with the advantage that (genuine) network effects are strengthened. Therefore, ‘collusion’ may well be in line with social welfare.      

Market structure in mobile telecoms: qualified indirect access and the receiver pays principle

Scarcity of spectrum limits the number of competing network operators in mobile telecoms. In the United Kingdom a regulatory review is currently enquiring into the effects of limited competition in the mobile market. The European Commission is also reviewing competition in roaming across mobile networks in Europe. In the UK the industry regulator Oftel claims that the prices for calling mobile phones are too high. We show that such relatively high prices stem from asymmetric incentives. The convention in the UK is for the originating party to pay for a telephone call. If instead the receiver were to pay for some or all of a call, we show that prices of calls to mobiles would be lower. We also argue that qualified indirect access could stimulate more effective competition in mobile telecoms.     

Fixed-mobile integration

Fixed-line incumbents often also own the largest mobile network. We consider the effect of this joint ownership on market outcomes. Our model predicts that while fixed-to-mobile call prices to the integrated mobile network are more efficient than under separation, those to rival mobile networks are distorted upwards, amplifying any incumbency advantage. This result is robust to changes in the competitiveness of the fixed market and to the presence of fixed-mobile substitution. As concerns potential remedies, a uniform off-net pricing constraint leads to higher welfare than functional separation, and even allows to maintain some of the efficiency gains.     

The impact of the regulation of the cable television industry: the effect on quality-adjusted cable television prices

Between the mid-1980s and early 1990s, cable television rates increased substantially. Simple price comparisons over the regulated and deregulated eras are difficult as the programming changed simultaneously. Using a modified hedonic framework to allow for the lack of competition on the supply side of the industry, this paper imputes the price for regulation era cable packages using consumers’ estimated willingness to pay for individual satellite networks during the unregulated period. Then a ‘quality adjusted’ price for the cable package offered in 1985 is estimated. On average, regulation benefited consumers by keeping prices below monopolist's profit maximizing price.     

TRAFFIC MANAGEMENT IN WHOLESALE INTERNATIONAL ROAMING: TOWARDS A MORE EFFICIENT MARKET?*

Despite a general trend of lower charges for mobile calls, in Europe, prices for international roaming calls have remained at levels that are surprisingly high. The apparent reluctance of mobile network operators to lower roaming tariff is generating many antitrust concerns. This paper presents in a two‐country two‐firm framework the functioning of the current system governing wholesale international roaming agreements based on interoperator tariffs. The focus is on the role of traffic management; thanks to the emergence of traffic direction techniques, mobile network operators are allowed to select the roaming partner. We show that, unless these techniques do not allow for perfect control on traffic flows, traffic management does not improve the market's efficiency. In line with the regulatory mechanism recently adopted by the European Commission, we show that a simple price cap mechanism may restore partial efficiency in the wholesale market. We also show that although cross‐border cooperation at the wholesale level is Pareto efficient, it will not emerge as an equilibrium of a two‐sided matching game.     

Empirical Evidence on the Relationship between Mobile Termination Rates and Firms' Profits

The theoretical literature on mobile termination rates (MTRs) is inconclusive on how the level of MTRs affects overall consumer charges and firms' profits. We show that when firms offer bundles with fixed included usage – a tariff structure that has become more common in recent years – an identical change in all MTRs does not affect firms' retail prices or profits. We use a panel dataset from saturated European markets to estimate the effect of MTRs on mobile operators' profits. As predicted by the theoretical model, we cannot reject the fact that firms' profits are unaffected by an identical change in all MTRs.     

Mobile Termination: What is the “Right” Charge?*

The regulation of fixed-to-mobile (F2M) termination charges has become increasingly important in Europe, Australia, and New Zealand under the Calling Party Pays principle. In the absence of any regulation, mobile operators have an incentive to set F2M termination charges “too high”. We show that the setting of the optimal F2M termination charges depends on the significance of network externalities, the intensity of competition in the mobile sector, and the distribution of customer preferences. We also discuss the merits of possible remedies which are not very intrusive. Tommaso Valletti has advised the European Commission and the UK regulator (OFCOM) on mobile termination and Frontier Economics has acted as advisor to a number of mobile operators on the same issue. The views expressed in this paper are those of the authors alone. We thank Carlo Cambini, Yulia Kossykh, participants to the 15th Biennial International Telecommunications Society Conference, the 3rd International Conference on Applied Infrastructure Research in Berlin, for their comments. We also thank the editor Michael Crew and two anonymous referees for many suggestions that have greatly improved the paper.     

Mobile termination rates and the receiver-pays regime

The European Commission has recently invited national regulatory authorities to decrease access charges to the cost of an efficient operator. Some large operators warned regulators and users that cutting access charges could result in the US style business model, where mobile users pay for both making and receiving calls. I show that mobile operators charge for incoming calls when the access charge is below cost even if receivers can hang up. In such a case profits are neutral with respect to the level of the access charge. I further show that ‘bill and keep’ is a constrained social optimum when the call externality is strong, even if receivers pay and can hang up. Finally, I discuss the policy implications of these results.     

On the Impact of “Callback” Competition on International Telephony

In this paper we build a simple three-country model to evaluate the impact of callback on international telephony. The effects on both accounting rates and collection prices are studied. Callback firms exploit arbitrage opportunities in collection prices among countries, rerouting calls that originate in countries with high prices for international phone calls via countries with low prices. Contrary to what is commonly perceived, we show that callback tends to magnify the distortions associated with the current accounting rate regime. In particular, callback puts upward pressure on low price countries accounting rates and on collection charges. Callback companies are assumed to enjoy a volume price discount on each rerouted call; we show that the larger the price discount offered to callback companies, the higher the prices for international calls in the country hosting callback.     

Customer ignorance, price-cap regulation, and rent-seeking in mobile roaming

Mobile phone usage when traveling abroad is expensive. Although the network connection switches frequently between available networks, the choice of network is largely independent of wholesale prices. As a consequence, we show that wholesale prices are strategic substitutes. The recent European price-cap regulation forces firms to reduce wholesale and retail roaming prices, but does not solve the underlying problem. There may thus be a permanent need for regulation analogous to what we have for domestic call termination. Furthermore, we show that there is a risk that wholesale price-cap regulation stimulates wasteful rent-seeking activity.     

Freeware as a competitive deterrent

Using perfect foresight and adaptive models, this paper examines the effect of competitor asymmetry, consumer sensitivity to incentives and adaptive processes on freeware strategies and competitive outcomes. Four roles played by freeware in competitive markets are identified – it can be a mechanism to build or speed up the growth of a network without the need to lower prices on the commercial version, a deterrence mechanism, a hindrance to a rival’s network building efforts, and a coordination device in the presence of forward looking consumers. We determine the optimal prices of the commercial version, the decisions to introduce freeware and the freeware qualities for both competing firms.     

Pricing policy of a U.S. telephone company

This paper analyses the pricing policy of a major U.S. telephone company in 1967. A mathematical programming model was used to calculate the prices per telephone call on each of three representative routes in each of four periods of the day which would be implied by a variety of alternative maximands (consumers' plus producers' surplus, profit, sales units, sales revenue), under a variety of alternative profit constraints and assuming capacity to be either fixed (at 1967 levels) or variable. Cost and demand data were supplied by several telephone company officials, and supplemented by published material. Sensitivity analysis was carried out on the demand elasticities. A total of one hundred versions of the model are reported on. Our major conclusions include: (i) Maximising consumers' plus producers' surplus subject to a pair of minimum profit constraints provided a good approximation to 1967 policy. (ii) There is perfect discrimination between large and small users for interstate toll calls. (iii) The effect of the state regulatory commission was to keep down the price of intrastate toll calls at the expense of interstate toll calls. (iv) As alternatives to regulation, perfect competition, if attainable, would increase benefits by about $100 million whereas perfect monopoly would reduce them by $300 million per annum, within the area of the company's operations.     

Commitment to regulatory bureaucracy

A model is considered in which ‘regulatory bureaucracy’ is in the best interest of consumers as well as the regulated firm. Making it more costly for the regulator to discern the firm's true costs can help motivate the firm to act in the interest of consumers. But this is only true if the regulator cannot make binding precommitments concerning the use of his policy instruments. Endowed with the ability to precommit, prices below marginal cost, investment in excess of efficient levels, and the absence of regulatory bureaucracy will characterize the optimal regulatory policy.     

Competition with asymmetric regulation of mobile termination charges

The aim of this paper is to explore the effectiveness of asymmetric regulation, which allows a new mobile network operator to set higher termination rates than the incumbent operator. We assume that there are two market segments: one in which operators compete on equal terms, with a new technology, and the other in which the entrant is at a disadvantage since the technology it offers is inferior to the incumbent??s. Results show that asymmetric regulation can create favorable conditions that allow the entrant to strengthen its market positioning, and enhance consumer net utilities and social welfare. This highlights the importance of the degree of network asymmetry and the ways in which consumers are split between the two market segments. Lastly, we show that asymmetric regulation can create greater investment incentives for the entrant which could effectively enhance social welfare. These findings can provide useful insights for regulatory policy.     

Bundling, product choice, and efficiency: Should cable television networks be offered à la carte?

We conduct a numerical analysis of bundling’s impact on a monopolist’s pricing and product choices and assess the implications for consumer welfare in cable television markets. Existing theory is ambiguous: for a given set of products, bundling likely transfers surplus from consumers to firms but also encourages products to be offered that might not be under à la carte pricing. Simulation of “Full À La Carte” for an economic environment calibrated to an average cable television system suggests that consumers would likely benefit from à la carte sales. If all networks continued to be offered, the average household’s surplus is predicted to increase by $6.80 (65.6%) under à la carte sales (despite a total bundle price that almost doubles) and reduced network profits would have to be such that 41 of 50 offered cable networks have to exit the market to make her indifferent. Simulation of a “Theme Tier” scenario provides intermediate benefits. The incremental marginal costs to cable systems of à la carte sales and its impact in the advertising market and on competition are important factors in determining consumer benefits.     

The Telecommunications Act at three years: an economic evaluation of its implementation by the Federal Communications Commission

The competitive free-for-all that Congress envisioned in the 1996 Telecommunications Act has for the most part not appeared. The Act calls for two forms of regulatorily-assisted entry into local markets: lease of network elements and resale. The FCC has decreed that the charges for those elements and the resale discounts must emulate the costs of an ideally-efficient firm. This standard is in fact not efficient, and the FCC’s attempt to jump-start the entry of competitors in this way has short-circuited the competitive process itself and jeopardized achievement of the goals of the Act.