Edited by Gerald R. Faulhaber, Gary Madden and Jeffrey Petchey
Chapter 13: Two-sided Markets with Substitution: Mobile Termination Revisited
Jerry A. Hausman INTRODUCTION In the emerging literature on two-sided markets (see Armstrong, 2006; Armstrong and Wright, 2006; Caillaud and Jullien, 2001, 2003; Rochet and Tirole, 2003, 2006), a central question of interest is how do platforms set the structure of prices across the two sides of the business, and associated with this, whether the resulting structure of prices is inefficiently distorted. This interest is motivated by the observation that in many such businesses, one side tends to pay disproportionately more than the other, and that in some cases regulators have stepped in to try to re-balance the structure of prices. An important industry where these issues directly arise in is mobile telephony. Concerns about the high level of the charges for terminating fixedto-mobile calls in those countries where such charges are not regulated, and the resulting high fixed-to-mobile retail prices, have led to widespread regulation of mobile termination charges. Examples of affected countries include Australia, France, Germany, Italy, Japan, and United Kingdom (UK).1 However, above-cost mobile termination charges also imply lower charges for mobile subscribers as mobile operators have an incentive to attract mobile subscribers to earn this subsidy (so-called waterbed effect).2 Thus, the two-sided market literature’s question of equilibrium versus efficient price structure naturally arises for mobile termination. Previous theoretical works to address this question include Armstrong (1997, 2002), Gans and King (2000), Thompson et al. (2007), Valletti and Houpis (2005) and Wright (1999, 2002). This body of work broadly argues: (1) even highly competitive mobile...
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