Open AccessTESTING THE “WATERBED” EFFECT IN MOBILE TELEPHONY
Author(s) -
Genakos Christos,
Valletti Tommaso
Publication year - 2011
Publication title -
journal of the european economic association
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 7.792
H-Index - 93
eISSN - 1542-4774
pISSN - 1542-4766
DOI - 10.1111/j.1542-4774.2011.01040.x
Subject(s) - competition (biology) , profit margin , profit (economics) , economics , mobile telephony , panel data , business , monetary economics , advertising , microeconomics , econometrics , telecommunications , marketing , computer science , ecology , mobile radio , biology
This paper examines the impact of regulatory intervention to cut termination rates of calls from fixed lines to mobile phones. Under quite general conditions of competition, theory suggests that lower termination charges will result in higher prices for mobile subscribers, a phenomenon known as the waterbed effect. The waterbed effect has long been hypothesized as a feature of many two‐sided markets and especially the mobile telephony industry. Using a uniquely constructed panel of mobile operators’ prices and profit margins across more than twenty countries over six years, we document empirically the existence and magnitude of this effect. Our results suggest that although regulation reduced termination rates by about 10%, this also led to a 5% increase in mobile retail prices. We also provide evidence that both competition and market saturation, and most importantly their interaction, affect the overall impact of the waterbed effect on prices.