EVENTS

Date:	Wednesday, December 3, 2003
Time:	10:30 AM -- 1:00 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

December 2003
Should Regulators Set Rates to Terminate Calls on Mobile Networks?

A heated debate over the proposed regulation of rates for calls from landlines to wireless networks is taking place in Australia, Europe, Asia, and North America. In the United States, the cellular user pays regardless of whether he is initiating or receiving a call (mobile party pays or MPP). In Europe, someone who places a call from a fixed line to a mobile line is charged a mobile termination rate set by the recipient's mobile network (calling party pays or CPP).  At a December 3 AEI  event, Robert W. Crandall and J. Gregory Sidak presented their paper "Should Regulators Set Rates to Terminate Calls on Mobile Networks?" forthcoming in the Yale Journal on Regulation. In this detailed economic analysis, the authors discussed whether regulation is justified and what access charge scheme is best for consumers.

When a person uses the traditional wireline telephone network to call another person on his cell phone, the fixed network must transfer the call to the mobile network to which the recipient subscribes. The fixed network is said to have provided originating access for the call, and the mobile network is said to have provided terminating access. In "Should Regulators Send Rates to Terminate Calls on Mobile Networks," Sidak and Crandall find that MPP creates better incentives than CPP for mobile network operators to place downward pressure on termination rates. Cellular telephone use in the United States and Canada has continued to increase at a significant pace despite the MPP regime and now far exceeds mobile telephone use in countries with CPP regimes. Multiple factors, including substitution possibilities for the callers of mobile subscribers, constrain the market power of mobile operators under CPP regimes in setting mobile termination rates. It is unrealistic for regulators to attempt to set mobile rates, including termination rates, at marginal cost. If large fixed network costs and customer acquisition costs must be recovered from variable charges, then marginal-cost-based pricing is not feasible. Because of network externalities in mobile telecommunications, the value to callers of being able to reach mobile subscribers justifies mobile termination charges that exceed marginal cost. Moreover, mobile termination rates that exceed marginal cost (or its proxy, long-run average incremental cost) are consistent with Ramsey (quasi-efficient) pricing. To the extent that high termination rates are a problem in countries that have embraced CPP, it is because customers are poorly informed of the charges they pay for their terminating call. Consumer education would solve the potential market failure without the need to impose price regulation on otherwise competitive markets.

The effectiveness of the CPP regime depends on the elasticity of demand over the time horizon examined.  In the short run, the caller's uncertainty over costs is likely to suppress usage.  Elasticity will increase over time as callers learn the pricing structures and substitute to low-cost alternatives. However, uncertainty exists as to how long consumers need to understand changing and relatively complicated pricing structures.

The panelists shared a belief that regulating prices at a level approximating marginal cost is inappropriate to the wireless industry.  The normal difficulties in calculating appropriate compensation for fixed costs would be exacerbated by the constant technological change.  Such regulation would discourage the new investment that has sustained the industry's growth. In addition, calculating network externalities would be daunting.

The question and answer session included discussion on the differences between different markets-such as the prevalence of bucket plans that include long distance in the United States and the existence of toll charges for local wireline calls in Europe (and generally higher wireline costs)-which affect subscribership and usage.  In both markets, evidence exists that consumers are substituting from wireline to wireless in instances where the latter is less expensive.

The increasing innovation and competitiveness of wireless telecommunications, the accompanying growth in subscribership and usage, and other telecommunications technologies still in the infancy of their deployment (such as internet telephony) promise sustained competitiveness in the telecommunications sector.

AEI staff assistant Brian Fried prepared this summary.