Testing the “waterbed” effect
in mobile telephony
Christos Genakos (University of Cambridge)
and
Tommaso Valletti (Imperial College London and University of Rome)
A “waterbed” effect
• Mobile telephony largely unregulated, with the
important exception of termination (MTR).
• The “bottleneck” monopoly problem.
• Mobile customers bring a termination “rent”.
• Competition for customers might exhaust this rent.
• Intervention to cut MTR -> can it cause other prices
to go up? The waterbed!
Mobile telephony and 2SM
• Waterbed effect general phenomenon in 2SM.
• Mobile telephony has been described as a “classic
2SM” in many court cases (NZ, 2005).
• Why subscribe to a network? Ability to exchange
messages/information between parties.
• Consumption involves both a “sender” and a “receiver”.
• Networks are “platforms” that bring together “senders”
and “receivers”.
• This has implications in terms of market definition and
analysis. Look at the behaviour of both parties.
Regulation and the waterbed effect
• Most regulators have established the need to intervene in F2M calls.
• MTR are regulated in many countries (one of the EC recommended
markets).
• Intervention has welfare implications.
• Waterbed is mentioned (since first MMC investigation), but never
assessed too carefully.
• Only anecdotal evidence
– Ofcom in UK (2006): it exists but is incomplete
– CC in New Zealand (2005): first did not believe it exists, then convinced
it exists but not sure about practical relevance
An illustration
101
100
99
98
97
96
priceppp
95
mtrppp
20
02
Q
3
20
02
Q
4
20
03
Q
1
20
03
Q
2
20
03
Q
3
20
03
Q
4
20
04
Q
1
20
04
Q
2
20
04
Q
3
20
04
Q
4
20
05
Q
1
20
05
Q
2
20
05
Q
3
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Q
4
20
06
Q
1
94
• France, medium user
• Evidence of no waterbed?
Empirical strategy
• Is there a termination rent?
– Elasticity of F2M calls has to be low
– (sanity check)
• Is there a waterbed effect?
– Exploit differential regulation between countries
and, within countries, between operators
– Is it full?
Data 1
• F2M elasticity:
– Monthly cross-country dataset from Vodafone, 2003-2006,
23 countries
•
•
•
•
F2M minutes
F2M revenue per minute
Number of subscribers
Market penetration
• Is there a termination rent?
Is there a termination rent?
• We estimate:
Qct = a0 + a1Tct + dc + dt + εct
–
–
–
–
c = 1, 2, …, denotes the different countries
t = 1, 2, …, denotes time
Qct denotes the total quantity of fixed-to-mobile
Tct denotes rates to terminate calls, by country and time.
FIXED TO MOBILE DEMAND ELASTICITY
(VODAFONE)
Variables
log(mtr)
(1)
-0.109**
[0.046]
log(subscribers)
log(mktpene)
log(mtr) *
log(subscribers)
Controls
Time f.e.
Country f.e.
Observations
Countries
Adj. R2
yes
yes
825
23
0.991
OLS-Fixed Effects
(2)
(3)
-0.213***
-0.216***
[0.008]
[0.009]
0.419***
0.381***
[0.000]
[0.000]
-0.264***
[0.099]
yes
yes
450
15
0.986
yes
yes
450
15
0.986
(4)
-0.205
[0.219]
0.405
[0.216]
-0.265
[0.103]
0.010
[0.942]
yes
yes
450
15
0.986
Results 1
• Yes, rent is likely.
• If firms could increase MTR above current
(regulated) levels, this would be profitable
for termination revenues.
• Other effects reasonable.
Data 2
• MTR from Cullen International
• Teligen (2002-2006):
– Total bill paid by consumers with a given calling profile (fixed
weights)
– High/medium/low user
– Pre-paid/post-paid
• Merril Lynch Global Wireless Matrix (2000-2005):
– ARPU (already includes incoming!)
– EBITDA
• Wireless Intelligence (2000-2006)
– EPPM (ARPU/minutes per user) (already includes incoming!)
Is there a waterbed effect?
• We estimate (IV):
Pjct = b0 + b1MTRjct + djc + dt + εjct
• MTRjct is instrumented using Regulation
• Very good instrument!
WATERBED EFFECT THROUGH MTR
Variables
log(mtr)
1st Stage Coef.
1st Stage R2
1st Stage F-test
Controls
Time f.e.
Country f.e.
Operator f.e.
Observations
Adj. R2
IV-Fixed Effects
Merrill Lynch
(3)
(4)
(5)
-1.271***
0.161
1.127***
[0.000]
[0.130]
[0.001]
Wireless
(6)
0.036
[0.766]
(1)
-1.220***
[0.000]
Teligen
(2)
0.027
[0.918]
-0.102***
[0.000]
0.0396
74.13***
[0.000]
-0.105***
[0.000]
0.044
78.52***
[0.000]
-0.104***
[0.000]
0.041
75.73***
[0.000]
-0.121***
[0.000]
0.053
47.80***
[0.000]
-0.111***
[0.000]
0.045
37.01***
[0.000]
-0.147***
[0.000]
0.089
33.34***
[0.000]
yes
yes
yes
1734
0.998
yes
yes
yes
1686
0.990
yes
yes
yes
1734
0.998
yes
yes
yes
1247
0.999
yes
yes
yes
1135
0.937
yes
yes
yes
492
0.999
WATERBED EFFECT THROUGH MTR
(Regional-Time Controls)
Variables
log(mtr)
1st Stage Coef.
1st Stage F-test
Controls
Region * Time f.e.
Operator f.e.
Observations
Adj. R2
(1)
-1.529***
[0.000]
IV-Fixed Effects
Teligen
Merrill Lynch
(2)
(3)
(4)
(5)
-0.137
-1.540***
0.240*
1.361***
[0.628]
[0.000]
[0.058]
[0.002]
Wireless
(6)
-0.019
[0.899]
-0.100***
[0.000]
-0.104***
[0.000]
-0.102***
[0.000]
-0.112***
[0.000]
-0.098***
[0.000]
-0.132***
[0.000]
yes
yes
1734
0.998
yes
yes
1686
0.990
yes
yes
1734
0.998
yes
yes
1247
0.998
yes
yes
1135
0.7467
yes
yes
492
0.999
Results 2
• The waterbed effect exists. Rule of thumb is 1:1.
• Teligen. Applies to post-paid, not to pre-paid
(Receive less calls? Expectation of receiving less
future incoming revenues?).
• ML. Negative impact on (accounting) profits:
there is not “neutrality”.
Caveat
• No data on handset subsidies (though should not
affect results with EBITDA).
• No country-time dummies (so far; though we did
regional-time joint effects).
• Results may be biased if a country, which is
regulated with low MTR is concentrated and
compared with another country not regulated but
competitive.
Conclusions and implications
• Mobile is a 2SM: market for subscription and
outgoing interlinked with market for incoming calls.
• This has antitrust implications.
• It may also have implications in terms of remedies
(welfare maximising regulated MTR) if elastic
subscription & network externalities.
• Concentrate more efforts on understanding
behaviour of marginal users.