CEIS Research Papers

Testing the “Waterbed” Effect in Mobile Telephony
Genakos Christos and Valletti Tommaso M.
CEIS Research Paper

Published in Journal of the European Economic Association, Vol.9, n.6, 2011

This paper examines the impact of regulatory intervention to cut termination rates of calls from fixed lines to mobile phones. Under quite general conditions of competition, theory suggests that lower termination charges will result in higher prices for mobile subscribers, a phenomenon known as the “waterbed” effect. The waterbed effect has long been hypothesized as a feature of many two-sided markets and especially the mobile telephony industry. Using a uniquely constructed panel of mobile operators’ prices and profit margins across more than twenty countries over six years, we document empirically the existence and magnitude of this effect. Our results suggest that the waterbed effect is strong, but not full. We also provide evidence that both competition and market saturation, but most importantly their interaction, affect the overall impact of the waterbed effect on prices.

Number: 110

Volume: 6

Issue: 2

Date: 11/07/2008