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The Effects of Lower Mobile Termination Rates (MTRs) on Retail Price and Demand

Policy initiatives to lower or eliminate Mobile Termination Rates (MTRs) reflect the belief that lower MTRs would tend to lead to lower retail unit prices for most end-users, and that these lower retail unit prices would lead to higher consumption of mobile services per user on average. Not all experts agree with this prediction. We review the theory and the literature, consider relevant European experience, and use econometric methods to study the impact of MTRs on retail price and demand for 61 mobile operators from 16 European countries in the period from 2003 to 2008. We find that lower MTRs tend indeed to result in a lower average retail unit price, with a highly significant coefficient of +0.71. That the coefficient is less than +1.0 confirms the existence of a "waterbed effect". Our results also demonstrate, with high significance, that lower MTRs (presumably operating through the mechanism of lower retail prices) tend to result in greater consumption of mobile services in terms of minutes of use per month per subscription. Long term elasticity (in the range of -0.52 to -0.61) is much greater than short term elasticity (-0.097).