Network Competition: Empirical Evidence on Mobile Termination Rates and Profitability

We analyze a model of multi firm competition between mobile network operators. The model assumes inelastic usage demand and full penetration, and allows for asymmetric termination rates, differences in marginal costs and vertical differentiation. A key property is that operators’ equilibrium profit is unaffected by an identical change in all termination rates in the market - we call this the profit neutrality hypothesis. The model is well suited for econometric implementation. We use a panel data set comprising north western European mobile operators to estimate equilibrium profit functions and find that we cannot reject the profit neutrality hypothesis. The results suggest that a reduction in mobile termination rate levels in mature markets will not necessarily benefit consumers.