1. Testing the “waterbed” effect in mobile telephony Christos Genakos (University of Cambridge) and Tommaso 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. We estimate: Q ct = a 0 + a 1 T ct + d c + d t + ε ct –c = 1, 2, …, denotes the different countries –t = 1, 2, …, denotes time –Q ct denotes the total quantity of fixed-to-mobile –T ct 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): P jct = b 0 + b 1 MTR jct + d jc + d t + ε jct MTR jct 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.