26 October 09: Welfare Effects of Alternative Approaches to Regulating Call Termination Rates in the UK Mobile Market
A Market Analysis report written on behalf of H3G UK for submission to Ofcom's recent consultation on the regulation of mobile termination rates (MTRs) can be downloaded from Ofcom's website here. It is also available on the Publications section of this website under Reports and Submissions. Further documents relating to Ofcom's consultation can be found here.
The report presents results from a calibrated model of the UK mobile market which includes five mobile networks; calls to and from the fixed network; network-based price discrimination; and call externalities. The analysis focuses on the short-run welfare effects of adopting significantly lower mobile termination rates in the UK, as recently proposed by the European Commission in its Recommendation on the Regulatory Treatment of Fixed and Mobile Termination Rates in the EU. The Commission has recommended reductions in average MTRs in Europe from approximately 8.5 cpm to 2.5 cpm or lower by 2012, and this is widely viewed as a first step toward the adoption of bill-and-keep (i.e. zero termination rates). The Commission's Recommendation and accompanying documents are available here.
Our simulations show that reducing MTRs broadly in line with the European Commission Recommendation to either "long-run incremental cost"; reciprocal termination charges with fixed networks; or bill-and-keep, increases social welfare, consumer surplus and mobile firms' profits. Depending on the strength of the call externality, social welfare may increase by as much as 1.1 billion 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 consistently leading to the highest increase in welfare when call externalities matter. In the longer run, lower MTRs should also reduce entry barriers and allow smaller networks to grow more rapidly, potentially creating a more competitive market and hence additional benefits in terms of allocative efficency and higher economic welfare.
In a forthcoming paper entitled "Welfare Effects of Alternative Approaches to Regulating Mobile Termination Rates in the UK," David Harbord (Market Analysis Ltd) and Steffen Hoernig (Universidade Nova de Lisboa) have recalibrated the model with more recent data, and estimate welfare gains from adopting the EC's recommendations ranging from 360 million to 2.5 billion per annum, depending upon the strength of call externalities. A preview of these results can be found in David Harbord's recent presentation to the ICC's Economic Regulation Masterclass in Bath, England, which is available on the Publications section of this website here.