Revisiting the “Waterbed Effects” across Europe’s mobile markets
Paper presented by E. BARANES, L. BENZONI and C.H. VUONG.
The aim of this paper is to present contrasting evidence to an interesting issue concerning the existence of the “waterbed effect” in Europe’s mobile telephony. This issue arises when reducing mobile termination rates (MTRs) generally increases the level of retail prices for mobile subscribers.
This is a key issue in Europe because the MTRs have been regulated to lower levels and oriented to costs of providing interconnection services with the so-called “glide path” regulation while there is apparently a lack of proper analysis on the “waterbed effect” in practice.
The main finding of this study is that the “waterbed effect” is not natural in Europe especially in the presence of several MNOs with asymmetric sizes in each market. In precision, this study demonstrates that when the MTRs were regulated to lower levels, later entrants generally cut retail prices to gain more market share since overall profits should depend more on the retail markets. There was consequently no “waterbed effect” at country level and “glide path” regulation played a positive role in improving the competitiveness of Europe’s mobile markets.