own termination rates decrease in line with investments, competitors’ termination rates
should either increase (in the absence of regulation), remain unaffected (with incen-
tive regulation and standard cost-based regulation) or decrease (with LRIC regulation).
Concerning traffic, both traffic to the investor and from the investor increases.
These findings are tested employing data for European mobile markets. With regard to
own investment effects I indeed find support for a termination rate reduction. More-
over, with lower termination rates also the amount of incoming traffic to the investor’s
network is increased. By replacing the empirical findings into the theoretical model one
gets the effect of investments on the investor’s wholesale profits which raises by about
4.7 to 6.7 percentage points due to doubling investments.
Concerning the effect on competitors’ profits, I find that the amount of incoming traffic
also increases, whereas termination rates decrease (as expected only in line with LRIC
regulation). I therefore replace the regulation parameters in the estimation equations
by their interaction terms with investments. In doing so I find only a weak, mostly
insignificant, additional effect on termination rates.
Since regulation is found to have only a minor impact on the investment effect on ter-
mination rates and off-net traffic it is concluded that the findings are probably due to
competitors’ strategic reaction. Combining the empirical findings with the theoretical
model we get the following results: While the impact of investments on competitors’
termination rates and traffic is not negligible only a small investment externality on
competitors’ profits could be identified. In particular, the direct investment effect on
incoming traffic compensates for the reduction in termination rates in the competitors’
profit function.
These findings raise the question whether MNPs probably behave as in a tit-for-tat
game: While a competitor loses only little in the short-run the investor is able to get a
positive return on its investments from incoming traffic and, in particular, also from its
own customers (because of a higher retail price-cost margin and more outgoing traffic).
As all MNPs invest continuously each of them gains from the others’ reluctance.19
Note that the analysis is based on some central limitations which are mainly due to the
challenge with data availability: First, I have only considered the short-term effect of
investments on termination rates and off-net traffic. In doing so I particularly ignore
investment costs and their depreciation over time which also enter the per-unit costs.
19Strategic interaction in mobile termination markets has been analyzed in Hoffler (2007).
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