Who should pay for two - way interconnection ?

European and the US mobile communication services markets have developed in rather different ways. There are striking differences in termination regulation and retail pricing models and one may wonder why this occurred and whether either of the markets outperforms the other in terms of efficiency and/or profitability. We address these issues by analyzing a symmetric oligopoly model in which firms are able, but not obliged, to charge subscribers for receiving and placing calls, may discriminate between onand off-net calls and may request a monthly subscription fee. We show that a continuum of equilibria exist for any reciprocal termination rate, some of which resemble the European business model (with zero charges for reception) while others resemble the US business model (with equal prices for placing and receiving calls). We show that under neither of these business models full efficiency can be achieved. Comparing the European business model with termination regulated at cost to the US business model with voluntary Bill and Keep arrangements we show that the European scenario is more efficient when call externality is modest, and more profitable when either call externality is modest and call demand elasticity high or call externality high and call demand elasticity low. Our predictions are consistent both with observed network operators’ opposition to lowering termination rates in Europe and with voluntary agreements to Bill and Keep arrangements in the US. ∗Hurkens: Institute for Economic Analysis (CSIC), BGSE, and Public-Private Sector Research Center (IESE Business School, University of Navarra, Spain), [email protected]. López: Departament d’Economia Aplicada (UAB), and Public-Private Sector Research Center (IESE Business School, University of Navarra, Spain), [email protected]. We thank Stefan Behringer, Carlo Cambini, Steffen Hoernig, Keizo Mizuno, Francesc Trillas, Tommaso Valletti and João Vareda for helpful discussions. Hurkens gratefully acknowledges financial support from the Spanish Ministry of Economy and Competitiveness, through grant ECO2012-37065 and through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV2011-0075). López gratefully acknowledges financial support from the Spanish Ministry of Economy and Competitiveness, through grant ECO2011-29533. Both authors gratefully acknowledge financial support from the Net Institute, http://www.Netinst.org. A previous draft of this paper was circulated under the title “Mobile Termination and Consumer Expectations under the Receiver-Pays Regime”.