Testing the “waterbed” effectin mobile telephony

Christos Genakos (University of Cambridge)and

Tommaso Valletti (Imperial College London and University of Rome)

A “waterbed” effect

• Mobile telephony largely unregulated, with the important exception of termination (MTR).

• The “bottleneck” monopoly problem.• Mobile customers bring a termination “rent”.• Competition for customers might exhaust this rent.• Intervention to cut MTR -> can it cause other prices

to go up? The waterbed!

Mobile telephony and 2SM

• Waterbed effect general phenomenon in 2SM.• Mobile telephony has been described as a “classic

2SM” in many court cases (NZ, 2005).• Why subscribe to a network? Ability to exchange

messages/information between parties.• Consumption involves both a “sender” and a “receiver”.• Networks are “platforms” that bring together “senders”

and “receivers”.• This has implications in terms of market definition and

analysis. Look at the behaviour of both parties.

Regulation and the waterbed effect

• Most regulators have established the need to intervene in F2M calls.• MTR are regulated in many countries (one of the EC recommended

markets).• Intervention has welfare implications.• Waterbed is mentioned (since first MMC investigation), but never

assessed too carefully.• Only anecdotal evidence

– Ofcom in UK (2006): it exists but is incomplete– CC in New Zealand (2005): first did not believe it exists, then convinced

it exists but not sure about practical relevance

An illustration

• France, medium user• Evidence of no waterbed?

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priceppp

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Empirical strategy

• Is there a termination rent?– Elasticity of F2M calls has to be low– (sanity check)

• Is there a waterbed effect?– Exploit differential regulation between countries

and, within countries, between operators– Is it full?

Data 1

• F2M elasticity:– Monthly cross-country dataset from Vodafone, 2003-2006,

23 countries• F2M minutes• F2M revenue per minute• Number of subscribers• Market penetration

• Is there a termination rent?

Is there a termination rent?

• We estimate:

Qct = a0 + a1Tct + dc + dt + εct

– c = 1, 2, …, denotes the different countries– t = 1, 2, …, denotes time– Qct denotes the total quantity of fixed-to-mobile– Tct denotes rates to terminate calls, by country and time.

FIXED TO MOBILE DEMAND ELASTICITY (VODAFONE)

OLS-Fixed Effects Variables (1) (2) (3) (4)

log(mtr) -0.109** [0.046]

-0.213*** [0.009]

-0.216*** [0.008]

-0.205 [0.219]

log(subscribers) 0.419*** [0.000]

0.381*** [0.000]

0.405 [0.216]

log(mktpene) -0.264*** [0.099]

-0.265 [0.103]

log(mtr) * log(subscribers)

0.010 [0.942]

Controls Time f.e. yes yes yes yes Country f.e. yes yes yes yes Observations 825 450 450 450 Countries 23 15 15 15 Adj. R2 0.991 0.986 0.986 0.986

Results 1

• Yes, rent is likely.

• If firms could increase MTR above current (regulated) levels, this would be profitable for termination revenues.

• Other effects reasonable.

Data 2

• MTR from Cullen International• Teligen (2002-2006):

– Total bill paid by consumers with a given calling profile (fixed weights)

– High/medium/low user– Pre-paid/post-paid

• Merril Lynch Global Wireless Matrix (2000-2005):– ARPU (already includes incoming!)– EBITDA

• Wireless Intelligence (2000-2006)– EPPM (ARPU/minutes per user) (already includes incoming!)

Is there a waterbed effect?

• We estimate (IV):

Pjct = b0 + b1MTRjct + djc + dt + εjct

• MTRjct is instrumented using Regulation• Very good instrument!

WATERBED EFFECT THROUGH MTR

IV-Fixed Effects Teligen Merrill Lynch Wireless

Variables (1) (2) (3) (4) (5) (6)

log(mtr) -1.220*** [0.000]

0.027 [0.918]

-1.271*** [0.000]

0.161 [0.130]

1.127*** [0.001]

0.036 [0.766]

1st Stage Coef. -0.102*** [0.000]

-0.105*** [0.000]

-0.104*** [0.000]

-0.121*** [0.000]

-0.111*** [0.000]

-0.147*** [0.000]

1st Stage R2 0.0396 0.044 0.041 0.053 0.045 0.089

1st Stage F-test 74.13*** [0.000]

78.52*** [0.000]

75.73*** [0.000]

47.80*** [0.000]

37.01*** [0.000]

33.34*** [0.000]

Controls Time f.e. yes yes yes yes yes yes Country f.e. yes yes yes yes yes yes Operator f.e. yes yes yes yes yes yes Observations 1734 1686 1734 1247 1135 492 Adj. R2 0.998 0.990 0.998 0.999 0.937 0.999

WATERBED EFFECT THROUGH MTR (Regional-Time Controls)

IV-Fixed Effects Teligen Merrill Lynch Wireless

Variables (1) (2) (3) (4) (5) (6)

log(mtr) -1.529*** [0.000]

-0.137 [0.628]

-1.540*** [0.000]

0.240* [0.058]

1.361*** [0.002]

-0.019 [0.899]

1st Stage Coef. -0.100*** [0.000]

-0.104*** [0.000]

-0.102*** [0.000]

-0.112*** [0.000]

-0.098*** [0.000]

-0.132*** [0.000]

1st Stage F-test Controls Region * Time f.e. yes yes yes yes yes yes Operator f.e. yes yes yes yes yes yes Observations 1734 1686 1734 1247 1135 492 Adj. R2 0.998 0.990 0.998 0.998 0.7467 0.999

Results 2

• The waterbed effect exists. Rule of thumb is 1:1.

• Teligen. Applies to post-paid, not to pre-paid (Receive less calls? Expectation of receiving less future incoming revenues?).

• ML. Negative impact on (accounting) profits: there is not “neutrality”.

Caveat

• No data on handset subsidies (though should not affect results with EBITDA).

• No country-time dummies (so far; though we did regional-time joint effects).

• Results may be biased if a country, which is regulated with low MTR is concentrated and compared with another country not regulated but competitive.

Conclusions and implications

• Mobile is a 2SM: market for subscription and outgoing interlinked with market for incoming calls.

• This has antitrust implications.• It may also have implications in terms of remedies

(welfare maximising regulated MTR) if elastic subscription & network externalities.

• Concentrate more efforts on understanding behaviour of marginal users.