Fixed-mobile substitution and termination rates

• We study the effect of termination rates on fixed-mobile substitution.
• Consumers substitute between fixed and mobile calls and access.
• A higher termination rate increase uptake of the respective service.
• In early market phase, high mobile and low fixed rates seem to have been optimal.
• But this fee structure leads to lower overall participation.

This paper studies the effect of termination rates on the observed substitution between fixed and mobile calls and access, in a model where consumers can subscribe to one or both types of offers. Simulations show that each (fixed or mobile) termination rate has a positive effect on the take-up of the corresponding service, via the waterbed effect, and lowers subscriptions to the other service, via a cost effect. The prevailing asymmetric regulation, with very low fixed and higher mobile termination rates, tends to have implemented the optimal fee structure. However, the interests of the mobile operators and of the different customer groups did not coincide, and this fee structure may have reduced overall market participation.