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The ongoing saga of mobile termination August 7, 2006

Posted by Jasper in Costing, Mobile.
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In a recent report Jerry Hausman and Julian Wright revisit the issue of mobile termination costing. The authors develop a framework where mobile subscribers can substitute cheaper mobile-to-mobile calls for expensive fixed-to-mobile calls. They purport to show how this substitution (which they claim has been ignored in the existing literature and regulatory proceedings) can undermine the normal argument of a competitive bottleneck in mobile termination. Termination charges, in equilibrium, are constrained by the ability of consumers to substitute.

The authors calibrate a model of the Australian market which shows that:

  • Penetration is maximized at (a =) $0.30 per minute since high FTM prices (above profit maxing level) encourage more subscription; and
  • Welfare is maximized at (aw =) $0.18, which is lower than equilibrium but much higher than cost of $0.05 (their estimate).

I must admit I find these results incredible and in need of a review. I will post commentary on the model when I have had a closer look.

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