Friday, June 18, 2010
Posted by D. Daniel Sokol
Sjaak Hurkensy (Institute for Economic Analysis (CSIC) and IESE) and Doh-Shin Jeon (Toulouse School of Economics and Universitat Pompeu Fabra) explain Mobile Termination and Mobile Penetration.
ABSTRACT: In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.