Mobile termination: Market power, externalities and their policy implications

Without regulation, market power in mobile termination is likely to result in mobile termination rates (MTRs) in excess of costs and cross-subsidised prices for mobile subscription/handsets. Mobile network operators (MNOs) argue that subsidisation is efficient, being justified by, inter alia, a network externality on new mobile subscriptions. However, especially in mature markets, the argument here is that MNOs will tend to set MTRs inefficiently high and subscription prices will be driven inefficiently low. Regulation is necessary to prevent these inefficiencies. Further, other externalities have different implications—e.g., the mobile call-receipt externality suggests a subsidy to mobile termination. The conclusion is that on balance and in the absence of detailed empirical estimation of the size of a multitude of possible types of externality, it is likely to be efficient to set MTRs to cost in markets with high penetration.