Testing the 'Waterbed' Effect in Mobile Telephony

Christos Genakos and Tommaso Valletti

CEP Discussion Papers from Centre for Economic Performance, LSE

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.

Keywords: telecommunications; regulation; Waterbed effect; two-sided markets (search for similar items in EconPapers)
JEL-codes: D21 L51 L96 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-com, nep-mic, nep-mkt, nep-net and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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https://cep.lse.ac.uk/pubs/download/dp0827.pdf (application/pdf)

Related works:
Journal Article: TESTING THE “WATERBED” EFFECT IN MOBILE TELEPHONY (2011)
Working Paper: Testing the "Waterbed" Effect in Mobile Telephony (2009)
Working Paper: Testing the “Waterbed” Effect in Mobile Telephony (2008)
Working Paper: Testing the "waterbed" effect in mobile telephony (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0827

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