Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)

Abstract

We present a calibrated model of the UK mobile telephony market with four mobile networks; calls to and from the …xed network; network-based price discrimination; and call externalities. Our results show that reducing mobile termination rates broadly in line with the recent European Commission Recommendation to either "pure long-run incremental cost"; reciprocal termination charges with …xed networks; or "Bill & Keep" (i.e. zero termination rates), increases social welfare, consumer surplus and networks' pro…ts. Depending on the strength of call externalities, social welfare may increase by as much as £ 990 million to £ 4.5 billion per year, with Bill & Keep leading to the highest increase in welfare. We also apply the model to estimate the welfare e¤ects of the 2010 merger between Orange and T-Mobile under di¤erent scenarios concerning MTRs, and predict that consumer surplus decreases strongly.

Seesaw in the Air: Interconnection Regulation and the Structure of Mobile Tariffs

“…The associated welfare changes should be estimated precisely in order to inform regulators and policy makers when they intervene. An alternative is to calibrate theoretical models with realistic demand and supply parameters (see Harbord and Hoernig, 2010). Given that this is the first attempt to bring some of the results of the two-way access prices literature to data, there is large room for improvement.…”

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

“…However, the empirical literature on the relationship between the level of MTRs and the level of overall retail charges and profits is sparse. Notable exceptions are Valletti (2011a, 2011b) and Harbord and Hoernig (2012). Genakos and Valletti (2011a) focus on fixed-to-mobile termination.…”

“…They depart from a model where mobile-to-mobile calls are suppressed, and find a significant waterbed effect. 7 In an analysis of the UK mobile market, Harbord and Hoernig (2012) find that reducing MTRs might increase social welfare.…”

Mobile Termination, Network Externalities and Consumer Expectations

“…Hurkens and L opez (2012) andHarbord and Hoernig (2012) already go some way in performing this exercise. They calibrate parameters using the models of passive and responsive expectations respectively.…”