Non-technical summary
European mobile communication markets are two-stage markets which are composed
of the infrastructure (the network and its components) and the service markets (tele-
phony, mobile internet, SMS). In contrast to most other network-based markets there
are multiple fully integrated providers which keep their own network and offer services
on their network. Following continuously conducted market inspections of the European
Commission, the revenue share of pure service providers is (still) below 10 percent in
each of the member states.
I concentrate on fully vertically integrated mobile network providers and analyze the
effect of investments on wholesale charges for call termination, termination charges, and
the amount of off-net traffic, that is the exchanged calling minutes between the investor’s
and the competitors’ networks. If one network provider invests into its network to reduce
the costs of service provision (or to increase service quality) it directly influences its offer
and its prices. Lower costs enable the investor to reduce its service prices which should
increase the traffic volume, what means the amount of calling in terms of the number of
calls and duration.
A competitor has to pay a network provider for terminating calls from its networks to
the other network. If the provider of the terminating network invests it is able to reduce
the termination rate which the other provider has to pay. As termination rates are costs
for the other provider, the investment also affects the incoming traffic from competitive
networks.
The European Commission asks national regulatory authorities to regulate termination
rates based on the so-called long-run incremental cost (LRIC) approach which encour-
ages infrastructure investments. The investment incentive of this regulation scheme has
been multiply proven in the literature. I show in a theoretical model that investments
increase the amount of incoming traffic both to the investor’s and to the competitors’
networks. Moreover, the cost-reduction reduces the investor’s termination rates. The
cost-reduction also lowers the investor’s termination rates but increases (in the absence
of regulation), reduces (with LRIC regulation) or keeps the competitors’ termination
rates constant (with standard cost-based or price-cap regulation).
Employing data for the European mobile markets I analyze the theoretical results in
a simultaneous estimation approach. While both the effects on off-net traffic and the
effect on own termination rates are confirmed, I find a negative effect of investments
on competitors’ termination rates which cannot be deduced from regulation. Moreover,
considering the change in profits from call termination it exists a positive effect on the
investor’s short-run profits but nearly no effect on competitors’ short-run profits though
I find a change in termination rates and in incoming traffic to competitors.
The empirical findings question the usually assumed importance of regulation for in-
vestment incentives. Moreover, investments and, in particular, the resulting change in
off-net traffic volumes seem to be driven by interactions among the network providers.