Regulating prices in two-sided markets: The waterbed experience in mobile telephony

The distinguishing feature of two-sided markets is that the pricing structure, that is, the relative prices charged to each side, matters. Regulators need to understand and account for the interdependence of prices in both sides. Some interventions that lower the prices on one side can result in higher prices on the other side of such markets. This article reviews the recent literature analyzing this waterbed phenomenon in mobile telephony and draws some more general lessons for policy interventions in two-sided markets.

► We examine the impact of regulatory intervention to cut termination rates of calls to mobile phones. ► We discuss the existence of a “waterbed effect” for mobile customers’ bills. ► The waterbed effect is strongest for post-paid contracts but diluted for pre-paid cards. ► General lessons are drawn for policy interventions in two-sided markets.