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A “waterbed” effect

Testing the “waterbed” effect in mobile telephony Christos Genakos (University of Cambridge) and Tommaso Valletti (Imperial College London and University of Rome). A “waterbed” effect. Mobile telephony largely unregulated, with the important exception of termination (MTR).

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A “waterbed” effect

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  1. Testing the “waterbed” effectin mobile telephonyChristos Genakos (University of Cambridge)andTommaso Valletti (Imperial College London and University of Rome)

  2. A “waterbed” effect • Mobile telephony largely unregulated, with the important exception of termination (MTR). • The “bottleneck” monopoly problem. • Mobile customers bring a termination “rent”. • Competition for customers might exhaust this rent. • Intervention to cut MTR -> can it cause other prices to go up? The waterbed!

  3. Mobile telephony and 2SM • Waterbed effect general phenomenon in 2SM. • Mobile telephony has been described as a “classic 2SM” in many court cases (NZ, 2005). • Why subscribe to a network? Ability to exchange messages/information between parties. • Consumption involves both a “sender” and a “receiver”. • Networks are “platforms” that bring together “senders” and “receivers”. • This has implications in terms of market definition and analysis. Look at the behaviour of both parties.

  4. Regulation and the waterbed effect • Most regulators have established the need to intervene in F2M calls. • MTR are regulated in many countries (one of the EC recommended markets). • Intervention has welfare implications. • Waterbed is mentioned (since first MMC investigation), but never assessed too carefully. • Only anecdotal evidence • Ofcom in UK (2006): it exists but is incomplete • CC in New Zealand (2005): first did not believe it exists, then convinced it exists but not sure about practical relevance

  5. An illustration • France, medium user • Evidence of no waterbed?

  6. Empirical strategy • Is there a termination rent? • Elasticity of F2M calls has to be low • (sanity check) • Is there a waterbed effect? • Exploit differential regulation between countries and, within countries, between operators • Is it full?

  7. Data 1 • F2M elasticity: • Monthly cross-country dataset from Vodafone, 2003-2006, 23 countries • F2M minutes • F2M revenue per minute • Number of subscribers • Market penetration • Is there a termination rent?

  8. Is there a termination rent? • We estimate: Qct = a0 + a1Tct + dc + dt + εct • c = 1, 2, …, denotes the different countries • t = 1, 2, …, denotes time • Qct denotes the total quantity of fixed-to-mobile • Tct denotes rates to terminate calls, by country and time.

  9. FIXED TO MOBILE DEMAND ELASTICITY (VODAFONE)

  10. Results 1 • Yes, rent is likely. • If firms could increase MTR above current (regulated) levels, this would be profitable for termination revenues. • Other effects reasonable.

  11. Data 2 • MTR from Cullen International • Teligen (2002-2006): • Total bill paid by consumers with a given calling profile (fixed weights) • High/medium/low user • Pre-paid/post-paid • Merril Lynch Global Wireless Matrix (2000-2005): • ARPU (already includes incoming!) • EBITDA • Wireless Intelligence (2000-2006) • EPPM (ARPU/minutes per user) (already includes incoming!)

  12. Is there a waterbed effect? • We estimate (IV): Pjct = b0 + b1MTRjct + djc + dt + εjct • MTRjct is instrumented using Regulation • Very good instrument!

  13. WATERBED EFFECT THROUGH MTR

  14. WATERBED EFFECT THROUGH MTR(Regional-Time Controls)

  15. Results 2 • The waterbed effect exists. Rule of thumb is 1:1. • Teligen. Applies to post-paid, not to pre-paid (Receive less calls? Expectation of receiving less future incoming revenues?). • ML. Negative impact on (accounting) profits: there is not “neutrality”.

  16. Caveat • No data on handset subsidies (though should not affect results with EBITDA). • No country-time dummies (so far; though we did regional-time joint effects). • Results may be biased if a country, which is regulated with low MTR is concentrated and compared with another country not regulated but competitive.

  17. Conclusions and implications • Mobile is a 2SM: market for subscription and outgoing interlinked with market for incoming calls. • This has antitrust implications. • It may also have implications in terms of remedies (welfare maximising regulated MTR) if elastic subscription & network externalities. • Concentrate more efforts on understanding behaviour of marginal users.

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