PDF A Comparative Study of Regulation and Pricing in Mobile Communications

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Pricing in Mobile Communications

A Comparative Study of Regulation and Pricing in Mobile Communications

Jun-ji Shih

Research Center for Humanities and Social Sciences (RCHSS) Academia Sinica

Taiwan

January 3, 2014

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Pricing in Mobile Communications CPP and RPP

CPP and RPP

Two major payment systems in world:

Calling Party Pays (CPP)

Caller, not receiver, pays.

CPP is used in Europe and most other countries.

Receiving Party Pays (RPP)

Consumer pays for both incoming and outgoing calls.

RPP is used for calls to mobile in US, Canada, PRC and HK.

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Pricing in Mobile Communications Fixed to Mobile (1/4)

Fixed to Mobile

I Under CPP, price of fixed to mobile calls, P, is divided in two parts, one belongs to fixed-line operator, another belongs to mobile operator.

I Mobile’s share isMobile Termination Rates (MTR).

I Fixed operator’s share is Origination Charges.

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I Fixed→ mobile calls are pricier than opposite direction.

I Fixed→ mobile calls average 3 times the longest national long-distance calls.

I High price leads to low usage, thus decreasing consumer welfare.

I So why are fixed→ mobile calls so pricey?

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I Traditional approach focuses on MRT ↑=⇒ P ↑ .

I Acc. to Bomsel et al. (2003), $25 billion flowed from fixed to mobile sector in excess MTR charges over costs during 1998-2002 in France, Germany, and the UK.

I Why are MTR so high? Possibly several factors; see Armstrong (1998), Gans and King (2000), Wright (2002), and Armstrong and Wright (2009).

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Key Point: Overpricing problems in some countries result from pricing system adopted.

Regime of fixed-to-mobile pricing

I Who sets retail price for fixed-to-mobile calls ?

I How to determine fixed-line origination charges and mobile termination charges ?

I Different regimes influence equilibrium price.

I This paper analyzes economic and welfare effects of regimes based on industrial organization theory.

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Pricing in Mobile Communications Regimes (1/5)

Regimes of Fixed to Mobile Pricing

1. Netherlands 2. Finland

3. United Kindom 4. France

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1. Regime of Netherlands

Mobile and fixed operators agree on price

In the Netherlands, mobile and fixed operators negotiate for an interconnection arrangement, including retail price and their shares of revenue.

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2. Regime of Finland

Mobile operators set termination charges, while fixed operators determine their origination charges independently

In Finland, price of fixed-to-mobile calls is sum of origination and termination charges, unilaterally set by fixed and mobile operators.

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3. Regime of UK

Fixed operators set price of fixed-to-mobile calls

Used in Australia, Denmark, Italy, Sweden and UK. Fixed operators set retail price for fixed-to-mobile call after

termination rate is set for calls terminating on mobile network.

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4. Regime of France

Mobile operators set price of fixed-to-mobile calls

Unlike UK, mobile operators set retail price for fixed-to-mobile calls, e.g. in France, Taiwan and Portugal.

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Pricing in Mobile Communications Notation

Notation

P: price of fixed-to-mobile call D(P): demand

Π: fixed-line operator profits π: mobile operator profits

c: marginal cost of fixed-line network t: marginal cost of mobile network S: fixed-line origination charges R: mobile termination charges m (Monopoly)

nl (Netherlands), fl (Finland), uk (UK), fr (France)

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Pricing in Mobile Communications Case 0: Monopoly

Essential Case: Integrated Monopoly

I Integrated monopoly sets price, P_m

Π_m = (P_m −c −t)D(P_m) (1) dΠ_m

dPm

=D(P_m^∗) + (P_m^∗ −c−t)D⁰(P_m^∗) = 0 (2) d²Π_m

<0

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Pricing in Mobile Communications Case 1: NL

Case 1: Regime of Netherlands

I Fixed and mobile operators negotiate over price, P_nl, and share of revenue,k

Πnl = (kPnl−c)D(Pnl) (3)

π_nl = [(1−k)P_nl−t]D(P_nl) (4)

max N =π_nl · Π_nl (5)

dN

dP_nl =D(P_nl^∗) + (P_nl^∗ −c −t)D⁰(P_nl^∗) = 0 (6) dN

dk =π_nl^∗ −Π^∗_nl = 0 (7)

=⇒ P_nl^∗ =P_m^∗ (8)

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Pricing in Mobile Communications Case 2: Finland (1/2)

Case 2: Regime of Finland

I Mobile setsRfl, fixed sets Sfl, independently

I P_fl is sum of R_fl and S_fl

Π_fl = (S_fl −c)D(P_fl) (9)

π_fl = (R_fl −t)D(P_fl) (10)

Pfl =Sfl +Rfl (11)

dΠ_fl

dS_fl =D(P_fl^∗) + (S_fl^∗−c)D⁰(P_fl^∗) = 0 (12) dπfl

=D(P^∗) + (R^∗−t)D⁰(P^∗) = 0 (13)

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Pricing in Mobile Communications Case 2: Finland (2/2)

dΠm

dP_m =D(P_m^∗) + (P_m^∗ −c−t)D⁰(P_m^∗) = 0 (2) dΠ_m

dP_m|_P_m_=P^∗

fl =D(P_fl^∗) + (P_fl^∗−c−t)D⁰(P_fl^∗) =−D(P_fl^∗)<0

=⇒ P_m^∗ <P_fl^∗

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Pricing in Mobile Communications Case 3: UK

Case 3: Regime of UK

I 1st stage: Negotiate R_uk

I 2nd stage: Fixed operator setsP_uk

λD(P_uk^∗ ) + (P_uk^∗ −c−t)D⁰(P_uk^∗ ) = 0, 1< λ <2 (22) dΠ_m

dP_m|_P_m_=P^∗

uk =D(P_uk^∗ ) + (P_uk^∗ −c −t)D⁰(P_uk^∗ )

= (1−λ)D(P_uk^∗ )<0

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Pricing in Mobile Communications Case 4: France

Case 4: Regime of France

I 1st stage: Negotiate S_fr

I 2nd stage: Mobile operator setsP_fr

θD(P_fr^∗) + (P_fr^∗ −c −t)D⁰(P_fr^∗) = 0, 1< θ <2 (27) dΠ_m

dP_m|_P_m_=P^∗

fr =D(P_fr^∗) + (P_fr^∗ −c−t)D⁰(P_fr^∗)

= (1−θ)D(P_fr^∗)<0

=⇒ P_fl^∗ >(P_fr^∗ RP_uk^∗ )>P_nl^∗ =P_m^∗ (28)

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Pricing in Mobile Communications Summary

Summary

Monopoly: D(P_m^∗) + (P_m^∗ −c−t)D⁰(P_m^∗) = 0 Netherlands: D(P_nl^∗) + (P_nl^∗ −c−t)D⁰(P_nl^∗) = 0 Finland: 2D(P_fl^∗) + (P_fl^∗−c−t)D⁰(P_fl^∗) = 0 UK: λD(P_uk^∗ ) + (P_uk^∗ −c−t)D⁰(P_uk^∗ ) = 0 France: θD(P_fr^∗) + (P_fr^∗ −c −t)D⁰(P_fr^∗) = 0

d²Πm

<0 =⇒P^∗ >(P^∗ RP^∗ )>P^∗ =P^∗

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Pricing in Mobile Communications Conclusion

Conclusion

I Netherlands regime reflects bilateral monopoly theory.

I Finland regime is based on Cournot’s copper-zinc competition theory.

I Regimes of UK and France apply double marginalization.

I Improper regimes result in higher than monopoly prices for fixed-to-mobile calls.

I To improve consumer welfare and encourage market efficiency, mobile industry needs to be regulated.