Access Pricing under Competition: An Application to Cellular Networks

A new class of access pricing problems is analyzed in which upstream firms compete for customers and access to these customers is required by downstream markets. Using fixed–to–cellular calls as an example, a model is presented which shows that the determination of cellular termination charges is quite different to standard access pricing problems. Competition between cellular firms leads to access prices being set either at, or above, the monopoly level. Applications are given for other market settings, including the termination of long–distance calls on competing local exchange networks and the setting of interchange fees in payment systems.     

Consumer behavior towards on-net/off-net price differentiation

This paper explores how consumers react towards price differentiation between on-net and off-net calls in mobile telecommunications - a pricing policy that is common in many mobile telecommunications markets. Based on a survey of 1044 students it is demonstrated that some consumers may suffer from a "price differentiation bias", i.e., a fair number of consumers may overestimate the savings that result from reduced on-net and/or off-net charges, as they do not appear to weigh the prices with the probabilities of placing off-net and on-net calls. This may help to explain why it have been the smaller operators in various countries who have introduced on-net/off-net price differentiation. The paper also discusses the implications that such a consumer bias may have for market competition.     

Should telecoms liberalisation stop at call termination?

In recent years concerns about the degree of competition in the provision of telecommunications call termination services have emerged. While the general consensus is that call origination is becoming more and more competitive, regulatory attention to call termination has widened in scope beyond the incumbent public telephone operators, leading to direct regulation of mobile termination charges in some countries and a debate on whether regulation should also be extended to “non-dominant” networks. This paper assesses whether these concerns are justified, extending the analysis to review the economic literature on reciprocal setting of termination charges between network operators. We conclude that while ex ante regulation of call termination simplifies the work of regulators it does not appear justifiable in all circumstances.     

Termination notice of mobile network operator customers after a tariff switch: An empirical study of postpaid subscribers in Germany

Proactive subscriber churn management strategies of mobile network operators (MNOs) require that steps are taken to keep customers before they hand over a formal notice of termination to their provider. Therefore, several studies have analyzed how MNO customers who gave a termination announcement differ from individuals who did not communicate this message. However, no work has examined such differences among subscribers who recently switched to another tariff of their MNO. Therefore, this paper explores socio-demographic, service consumption and tariff change differences between contract cancellation “announcers” and “non-announcers” in a sample of 1810 postpaid customers who had changed their rate plan not long ago. Cancellation announcers were more likely to be males who decreased their mobile voice consumption after their tariff switch, had already attempted to churn in the past, had moved from an unmetered to a metered rate type, paid higher monthly bill amounts and received no discounts on their current rate plan that was introduced on the market some time ago. Among subscribers who gave a termination notice, early (late) cancellation announcers were more likely to be older (younger) customers with a growing (shrinking) SMS consumption after their tariff switch, had not attempted (had already tried) to leave their current MNO in the past, and were in a rate plan that was (not) recently introduced. The findings contribute to the literature on mobile customer retention and have implications for practitioners and scholars.     

TP case study: fixed–mobile interconnection in India

The Telecommunications Regulatory Authority of India (TRAI) attempted, in late 1999, to introduce the calling party pays (CPP) regime for mobile cellular services, with a corresponding revenue-sharing arrangement between fixed and mobile operators. According to the revenue-sharing proposal, mobile operators in India were to be compensated for carrying traffic to and from the fixed networks. Under their original license conditions, fixed operators (usually one of the two state-owned incumbents) were not paying mobile operators for terminating calls on their networks. However, mobile operators had to compensate the state-owned incumbent for terminating traffic. This unfavourable environment for mobile operators has meant that mobile services have not been able to reach their full potential in India. There was great disappointment within the mobile industry when the TRAI's CPP order was overturned by the Supreme Court of India in early 2000, due to lack of jurisdiction. Since then, the enabling legislation has been amended. It is hoped that the new provisions of the TRAI Act will empower the regulator to establish a level playing field for mobile network operators. It is only through the creation of a suitable framework for interconnection that the TRAI will be able to ensure the success of telecommunications reform in India.     

Pricing calls to mobiles: analysis of the UK Monopolies & Mergers Commission Reports on mobile termination charges

The UK Monopolies and Mergers Commission (MMC) nine-month inquiry into fixed-to-mobile termination charges provides an exhaustive analysis of competitive and cost factors in mobile telephony. Its recommendations are discussed and compared with those of the telecommunications regulator, OFTEL, which referred the mobile operators to the MMC after failure to agree a further reduction in charges in early 1998. The MMC, following the same general statutory duty required of OFTEL, to promote competition under the Telecommunications Act 1984, provided a radically different analysis and disagreed with most of OFTEL's specific proposals suggesting that some were anti-competitive. As telecommunications regulators are increasingly required to implement pro-competitive regulation, the MMC's reports show that the evolving approach of sectoral regulators contains some significant flaws.     

INFORMATION EXCHANGE AND COMPETITION IN COMMUNICATIONS NETWORKS*

We develop a model of information exchange between calling parties. We characterize the equilibrium when two interconnected networks compete by charging both for outgoing and incoming calls. We show that networks have reduced incentives to use off‐net price discrimination to induce a connectivity breakdown when calls originated and received are complements in the information exchange. This breakdown disappears if operators are allowed to negotiate reciprocal access charges. We also study the relationship between sending and receiving retail charges as a function of the level of access charges. We identify circumstances where private negotiations over access charges induce first‐best retail prices.     

Optimal mobile termination rate: The Brazilian mobile market case

This paper presents a study of the impacts of changes in the mobile termination rate in Brazil using 2008 as the base year. For this we use an extension of the monopolistic competition model used by Wright, Thompson, and Renard (2007) allowing for the charge of interconnection fee also from calls originating on mobile networks and differentiated prices for on-net and off-net calls. After calibration of the model parameters and estimation of the price elasticity of demand for mobile services, we conduct a comparative static analysis varying the mobile termination rate in order to find the optimal value for that parameter. Finally, we provide some discussions on policy regulation in that sector depending on the objective of the regulator agency.     

The impact of regulation on the retail prices in fixed-line telephony across the European Union

This paper estimates reduced-form models for incumbent prices in the fixed telecommunications industry using data for European Union (EU) countries from 1998 to 2002. The regulation of fixed-line telephony has a significant impact on prices for residential consumers. Liberalization of the telecommunications industry decreased retail prices by about 8.2%. The introduction of carrier pre-selection and number portability had a negative impact on price levels. The estimation results also suggest that a 1% decrease in termination charges on the incumbent network led on average to a 0.17% decrease in the cost of usage basket for residential consumers. Furthermore, in the pricing regressions for incumbent local and national calls at peak and off-peak times interconnection charges are significant only in the estimation of national peak prices. A 1% decrease in single transit interconnection charges on the incumbent network led to a 0.31% decrease in incumbent national prices at peak times, as calculated for the average prices in the EU in 2002.     

An Econometric Analysis of Telecom Competition, Privatization, and Regulation in Africa and Latin America

This paper explores the effects of privatization, competition, and regulation on telecommunications performance in 30 African and Latin American countries from 1984 through 1997. Fixed-effects regressions reveal that competitionömeasured by mobile operators not owned by the incumbentöis correlated with increases in the per capita number of mainlines, payphones, and connection capacity, and with decreases in the price of local calls. Privatization combined with an independent regulator is positively correlated with telecom performance measures. Privatization alone, however, is associated with few benefits, and is negatively correlated with connection capacity.     

The effect of subscriber line charges on residential telephone bills

This paper evaluates the way in which subscriber line charges (SLCs) have affected telephone company residential customers, comparing residential telephone bills before and after the $2.60 SLC began. Customer bills are analyses using the net bill reduction method and the consumer welfare method. Bills of low-income area and senior citizen customers are studied using a similar technique. The cumulative bill savings accruing to customers whose bills have been lowered for outweigh the small increases experienced by those whose bills are higher. Since the SLC programme began, interstate long-distance usage by low-income area customers has grown, on average, to nearly the same levels as usage for all residential customers.     

Prices for long-distance voice telephony in Germany

This paper examines the first 16 months of competition in the German market for long-distance voice telephony on the fixed network. It concentrates on price level and price structure. Competition induced by the entry of both network operators and switch-based service providers decreased the price level substantially. Furthermore, after initial attempts to design innovative price structures, most firms gave up differentiation, and instead charged uniform prices for long-distance calls for residential customers. Moreover, the decrease in the price level seems to have induced a shift in the peak-load structure, which raises concern about the regulation of the peak-load structure of interconnection charges.     

Termination-discriminatory pricing,subscriber bandwagons,and network traffic patterns: the Taiwanese mobile phone market

This article studies network effects induced by termination-based price discrimination in the evolving Taiwan mobile phone market. An econometric model that estimates the effects attests to the formation of bandwagon behavior among network subscribers. It is shown that networks with a large subscriber base will recruit a disproportionately greater share of new users ceteris paribus compared with low-penetration operators. The strength of the subscriber bandwagon varies closely with the price differential of intra- and inter-network calls. Also, analysis of network traffic reveals that an average mobile phone user consumes considerably less inter-network than intra-network airtime; consequently, mobile phone use is largely clustered within respective networks and hindered from traversing others.     

Network effects and preference heterogeneity in the case of mobile telecommunications markets

This paper demonstrates how revealed- and stated-preference analyses can be used for modeling network effects in the field of mobile telecommunications. The aim of this study was to verify if network effects may still play a role in the Polish mobile telecommunications market, measure their strength, identify their sources and variability across consumers by accounting for consumers' observable and unobservable preference heterogeneity, evaluate their monetary value to consumers, and finally, to verify if the marginal utility associated with network effects is constant. The analysis of consumers' revealed choices (currently used mobile telephone operator) allowed the identification of major differences between customer bases of incumbent and new entrant operators, and insight into the business strategies adopted in the presence of asymmetric regulation of mobile termination rates. The second part of the study—the analysis of the consumers' stated choices (made in carefully prepared and designed hypothetical choice situations, known as the choice experiments) made it possible to directly model consumers' utility functions and, in this way, investigate the nature of network effects in mobile telecommunications markets. From the results, the presence of strong network effects, which are related to the ratio of consumers' social network group using the same operator, and to the magnitude of on-net price discounts, is confirmed. These network effects can be disaggregated to pecuniary and non-pecuniary effects. Through the utilization of the random parameters multinomial logit model, consumers' observable and unobservable preference heterogeneity can be accounted for, which proved a scientifically revealing and potentially policy-relevant approach. The results might be of a particular interest to other researchers aiming at modeling consumers' preferences as well as to mobile telephone operators and regulatory authorities—it is shown that capacity for vigorous price competition between mobile operators is limited by non-price factors, which affect subscriber's choices, especially in the presence of asymmetric mobile termination rates.     

Customer retention,loyalty, and satisfaction in the German mobile cellular telecommunications market

Customer retention (CR), loyalty (CL), and satisfaction (CS) are important (intermediate) goals for telecommunication network operators on their way to superior economic success in the liberalised German market. Therefore, drawing on a sample of 684 residential customers of digital cellular network operators in Germany this study tests hypotheses suggesting that CR, CL, and CS should be treated as differential constructs which are causally inter-linked. LISREL analyses support a two-staged model in which overall CS has a significant impact on CL which in turn influences a customer's intention to terminate/extend the contractual relationship with his mobile cellular network operator (=CR). Mobile service price and personal service benefit perceptions as well as (lack of) number portability between various cellular operators were identified as supply-related variables with the strongest effects on CR. Mobile network operators’ perceived customer care performance had no significant impact on CR. The findings suggest that an important lever for regulators to promote competition in cellular markets is the enforcement of efficient number portability procedures between mobile network operators.     

Competition reform and household welfare: A microsimulation analysis of the telecommunication sector in Ethiopia

This paper presents a novel simulation method for estimating the likely welfare effects of policy reforms aimed at increasing competition in strategic economic sectors such as mobile phone services. The proposed method relies on a partial equilibrium simulation approach and estimates the welfare impacts on current consumers and the potential welfare effects among new consumers brought into the market by changes in prices due to competition. This approach is applied to the information and communication technology (ICT) sector in Ethiopia, one of the three countries in the world with a monopoly in the market for mobile phone services. Based on household budget survey data for 2015/16 and departing from a baseline reform scenario that dilutes the market share of the state-owned monopoly to 45 percent, the simulation model estimates a 25.3 percent reduction in the price of mobile services and an increase in 5.7 million new users of mobile services. The predicted drop in prices and increased users would generate a combined relative welfare gain of 1.18 percent (1.09 percent among current users and 0.09 percent among new users), that could be translated into a 0.31 percentage point decline in the national poverty rate and equivalent to lifting about 275,000 people out of poverty. Alternative reform scenarios that dilute the market share of the monopoly to 75 percent and to 30 percent are expected to reduce poverty rate in 0.13 and 0.52 percentage points, respectively. The method proposed in this study represents a useful tool for promoting competition reforms in developing countries, particularly in sectors known for excluding significant segments of the population because of high consumer prices.     

International roaming in the EU: Current overview,challenges, opportunities and solutions

As technology evolves and globalization continues, the need for reasonably priced roaming services has never been higher. In 2007, the European Commission (EC) introduced a first set of regulatory decisions to cap the maximal roaming fee end users have to pay for voice services. In the years after, additional price caps have been introduced for SMS and data, initially only for end users, in a later stage also for the wholesale tariff. The final step, Roaming Like at Home (RLAH), will start to take effect in June 2017; from then on end users will pay the same price (for voice, SMS and data) when roaming like in their domestic country.The effect of RLAH on the business case of each mobile operator is hard to predict, as the different national markets are extremely heterogeneous and operators face large discrepancies in terms of roaming usage and network costs due to different travelling patterns and various other reasons that cannot be harmonized (geography, economics, working force, usage history, etc.). Furthermore, competition in the telecom market will no longer be a purely national matter, as the decision to abolish roaming tariffs will fully open up cross-border competition.This paper aims at providing insights in the effect of RLAH for both the end user as well as the mobile operators. Following a literature survey approach, including an overview of the roaming regulation process from 2007 up to now, the paper discusses possible effects the RLAH initiative might trigger, going from lower wholesale prices for mobile operators to higher retail prices for end users. Additionally, as the European Commission strives for a digital single market, this paper presents a number of technical solutions (carrier portability, software-based SIMs, cross-border IMSI, Roaming like a Local, Wi-Fi offloading) that may pose a - partial or full - alternative for roaming and explains how these may impact cross-border competition both positively and negatively. The solutions are assessed against two axes: (1) generating the best possible outcome for the end customers (in all countries) and (2) ensuring the best level playing field for (virtual) mobile operators in Europe, which will of course involve trade-offs on different levels.     

Link between termination rates and retail prices in Namibia,Kenya and South Africa

This paper analyses the link between mobile termination rate reductions and retail prices. It draws on in-depth case studies of South Africa, Namibia and Kenya where regulators have reduced termination rates towards the cost of an efficient operator. To varying degrees these have all led to lower retail prices and significant market expansion. While retail prices in both Namibia and Kenya dropped following substantial termination rate reductions, the South African case demonstrates that termination rate reductions are not always passed on to consumers as is hoped by such regulatory interventions. In South Africa, it was only after the second reduction in March 2012 that smaller operators were able to reduce their off-net prices to a level that could tempt the subscribers to dominant operators to switch. All the case studies confirm nevertheless that retail prices do not go up in response to termination rates going down as contended by dominant mobile operators around the world. This is in contrast to a body of literature stating that termination rates and mobile retail prices constitute a two-sided market and that termination rate reductions will lead to a so-called “waterbed effect”.     

User benefits and operator costs of mobile number portability in Japan and impact on market competitiveness

This paper aims to review the process of mobile phone operators agreeing to introduce mobile number portability (MNP) in Japan. A study group formed by the Ministry of Internal Affairs and Communications estimated the proportion of MNP users and analyzed the user benefits and associated costs to introduce MNP. Owing to the particular market structure and technology available, MNP was expected to yield a larger benefit in the Japanese mobile market than that seen in other countries. Based on the results of the research reviewed with respect to the market situation one year after introducing MNP, the increased competition in the mobile phone market was onfirmed by decreasing call charges and a reduction in the share of the dominant operator.