8 March 2010: New paper "Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)" by David Harbord and Steffen Hoernig available
A new paper entitled "Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)" by David Harbord and Steffen Hoernig is available on the Publications section of our website.
The 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 (pounds sterling) 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. We show that the likely effects of the merger on efficiency depend on the strength of call externalities, when MTRs are set at the their current, regulated levels. The adoption of bill-and-keep should ameliorate these aggregate welfare effects, although serious concerns about the merger's negative impact on consumers remain. The undertakings agreed between the companies and the European Commission do not appear to address these concerns.
The paper can be also be downloaded from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1564083.