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The strength of the waterbed effect depends on tariff type

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  • Hoernig, Steffen

Abstract

We show that the waterbed effect, i.e. the pass-through of a change in one price of a firm to its other prices, is much stronger if the latter include subscription rather than only usage fees. In particular, in mobile network competition with a fixed number of customers, the waterbed effect is full under two-part tariffs, while it is only partial under linear tariffs.

Suggested Citation

  • Hoernig, Steffen, 2014. "The strength of the waterbed effect depends on tariff type," Economics Letters, Elsevier, vol. 125(2), pages 291-294.
    • Handle: RePEc:eee:ecolet:v:125:y:2014:i:2:p:291-294
    DOI: 10.1016/j.econlet.2014.09.022
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    References listed on IDEAS

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    1. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring.
    2. Christos Genakos & Tommaso Valletti, 2011. "Testing The “Waterbed” Effect In Mobile Telephony," Journal of the European Economic Association, European Economic Association, vol. 9(6), pages 1114-1142, December.
    3. Genakos, Christos & Valletti, Tommaso, 2011. "Seesaw in the air: Interconnection regulation and the structure of mobile tariffs," Information Economics and Policy, Elsevier, vol. 23(2), pages 159-170, June.
    4. Schiff Aaron, 2008. "The "Waterbed" Effect and Price Regulation," Review of Network Economics, De Gruyter, vol. 7(3), pages 1-23, September.
    5. Hoernig, Steffen, 2014. "Competition between multiple asymmetric networks: Theory and applications," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 57-69.
    6. Julian Wright, 2002. "Access Pricing under Competition: An Application to Cellular Networks," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 289-315, September.
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    More about this item

    Keywords

    Waterbed effect; Two-part tariff; Linear tariff; Mobile termination; Two-sided platforms;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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