Seesaw in the air: interconnection regulation and the structure of mobile tariffs

Interconnection rates are a key variable in telecommunications markets. Every call that is placed must be terminated by the network of the receiving party, thus the termination end has the characteristic of an economic bottleneck and is subject to regulation in many countries. This paper examines the impact of regulatory intervention to cut termination rates of calls to mobile phones. We argue that regulatory cuts should have a differential impact according to the type of tariff the mobile customer subscribes to. While all mobile customers may pay higher prices because of a “waterbed” effect, termination rates also affect competition among mobile operators. We show that the waterbed effect is diluted, but not eliminated, for customers with pre-paid cards, where regulation also acts as impediment to “raise-each-other’s-cost” collusive strategies that mobile networks can adopt. The waterbed effect is instead strongest for consumers with monthly (post-paid) subscription contracts.