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Testing the "waterbed" effect in mobile telephony

Genakos, Christos and Valletti, Tommaso (2007) Testing the "waterbed" effect in mobile telephony. CEPDP, 827. Centre for Economic Performance, London School of Economics and Political Science, London, UK. ISBN 9780853280903

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Abstract

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 network 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 the waterbed effect is strong, but not full. We also provide evidence that both competition and market saturation, but most importantly their interaction, affect the overall impact of the waterbed effect on prices.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 2007 the authors
Library of Congress subject classification: H Social Sciences > HE Transportation and Communications
H Social Sciences > HD Industries. Land use. Labor
Journal of Economic Literature Classification System: L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation
L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L96 - Telecommunications
D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 827
Date Deposited: 18 Jul 2008 15:40
URL: http://eprints.lse.ac.uk/19680/

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