Mobile Termination, Network Externalities and Consumer Expectations
We thank the editor and two anonymous referees, Luís Cabral, Giulio Federico, Doh-Shin Jeon, Bruno Jullien, and Patrick Rey, the seminar audiences at IAE, University of the Basque Country, University of Groningen, University of Vienna, TSE, ZEW Mannheim, UB, EUI, UAB, University of Alicante, IE Business School, Bank of Canada, University of Navarra, University of Valencia and Universidade de Évora and conference participants at EEA 2011 (Oslo) for helpful comments. 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 (SEV-2011-0075). López gratefully acknowledges the financial support of the Spanish Ministry of Economy and Competitiveness under ECO2008-05155 and ECO2011-29533, and from the Juan de la Cierva Programme.
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 when termination charges increase. This is puzzling as in reality regulators are pushing termination rates down while being opposed to do so by network operators. This puzzle is resolved when consumers' expectations are assumed passive but required to be fulfilled in equilibrium, as defined by Katz and Shapiro (1985), instead of being responsive to non-equilibrium prices, as assumed until now.