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IESE Research Papers,
IESE Business School

No D/850: Mobile termination, network externalities, and consumer expectations

Sjaak Hurkens and Angel Lopez ()
Additional contact information
Sjaak Hurkens: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Angel Lopez: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN

Abstract: We re-examine the literature on mobile termination in the presence of network externalities. Externalities arise when firms discriminate between on- and off-net calls or when subscription demand is elastic. This literature predicts that profit decreases and consumer surplus increases in termination charge in a neighborhood of termination cost. This creates a puzzle since in reality we see regulators worldwide pushing termination rates down while being opposed by network operators. We show that this puzzle is resolved when consumers¿ expectations are assumed passive but required to be fulfilled in equilibrium (as defined by Katz and Shapiro, AER 1985), instead of being rationally responsive to non-equilibrium prices, as assumed until now.

Keywords: Networks; Rational Expectations; Access Pricing; Interconnection; Regulation; Telecommunications

JEL-codes: K23; L51; L96

50 pages, March 3, 2010

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DI-0850-E.pdf PDF-file

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