Mobile price structures : two sides of the market

I hope you enjoy our seventh Vodafone Policy Paper. Our aim in these papers is to provide a platform for leading experts to write on issues in public policy that are important to us at Vodafone. These are the people that we listen to, even if we do not always agree with them. These are their views, not ours. We think that they have important things to say that should be of interest to anybody concerned with good public policy. Mobile price structures: two sides of the market Telecommunications networks are examples of two-sided markets: providing communication services to their own subscribers and, over the same platform, providing connectivity to their own subscriber base for users of other networks. The two markets are linked: more subscribers on a particular network means more opportunities for users of other networks to make calls and, looking ahead, more opportunities for providers of mobile content to supply their services. This linkage provides the essence of a two-sided market. Whenever we look at two-sided markets, one striking observation is immediately apparent: the structure of prices (i.e. who pays for what) is fundamentally important for the development of the market. If credit card companies charge annual fees, this will affect both the number of customers they acquire, and appeal of the network to merchants. Similarly, if media channels increase subscriber or viewer charges, they risk losing advertising revenue. In both these simple cases, the two-sided network provider will aim to balance prices in order to encourage take-up on both sides. The first two papers in this pamphlet are written by economists who have researched two-sided markets in telecommunications and other industries. The views expressed are those of the authors and not Vodafone, but they demonstrate the importance of the two-sided analysis of telecommunications markets that Vodafone has always advocated. The first paper, by Dr David Evans, places mobile telecommunications networks in this context. The conclusion is simple, but important for any price regulation of the industry: trying to equate price structures to cost structures will move the industry away from what would otherwise be its competitive equilibrium development path. Regulation in the context of two-sided markets is much more difficult and can easily do more harm than good. One particular aspect of mobile telecommunications is the " waterbed " , a term first coined in meetings between Vodafone and Professor Paul Geroski of the Competition Commission …