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Abstract

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 provides originating access for the call, and the mobile network provides terminating access. This paper provides an economic analysis of the regulation of fixed-to-mobile termination rates. Mobile party pays ("MPP") creates better incentives than calling party pays ("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 in setting mobile termination rates under CPP regimes. 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. Also, the value to callers of being able to reach mobile subscribers justifies mobile termination charges that exceed marginal cost because of network externalities in mobile telecommunications. Finally, 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 calls. Consumer education would solve the potential market failure without the need to impose price regulation on otherwise competitive markets.

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