DP7730 Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)

Author(s): David Harbord, Steffen Hoernig
Publication Date: March 2010
Keyword(s): mobile termination rates, network effects, regulation, simulations, telecommunications, welfare
JEL(s): D43, L13, L51, L96
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7730

This paper presents results from a calibrated welfare model of the UK mobile telephony market which includes many mobile networks; calls to and from the fixed network; networkbased price discrimination; and call externalities. The analysis focuses on the short-run effects of adopting lower mobile termination rates (MTRs) on total welfare, consumer surplus and profits. Our simulations show that reducing MTRs broadly in line with the recent European Commission Recommendation to either "long-run incremental cost"; reciprocal termination charges with fixed networks; or "bill-and-keep" (i.e. zero termination rates), increases social welfare, consumer surplus and networks? profits. Depending on the strength of call externalities, social welfare may increase by as much as £360 million to £2.5 billion per year. The analysis thus lends support to a move away from fully-allocated cost pricing and towards much lower MTRs, with bill-and-keep frequently leading to the highest increase in welfare when call externalities matter. We also apply the model to estimate the welfare effects of the recently-approved merger between Orange and T-Mobile under two different scenarios concerning MTRs.