Bilateral monopoly in telecommunications: bargaining over fixed-to-mobile termination rates

Résumé

It is broadly accepted that mobile network operators are monopolists when they set the termination rate for the calls made to their own network. This is the main rationale under the regulatory activity in most European countries. Indeed, if left unregulated, fixed-to-mobile termination rates would be set too high, mainly because of two reasons: first, the mobile-to-fixed termination rates are usually regulated at cost, and second the fixed network operator has the obligation to terminate the incoming calls. So fixed provider can neither threaten to raise the mobile-to-fixed termination charge, nor to refuse to terminate the call. We propose a policy to overcome this termination bottleneck imposing reciprocity between the mobile-to-fixed and fixed-to-mobile termination rates and relaxing the interconnection obligation. To solve the model we set-up simultaneous negotiations over the termination rates between the network operators. We show that fixed-to-mobile termination rates depend negatively on the mobile-to-mobile termination rate and positively on the intensity of competition in the mobile sector. Moreover, imposing reciprocity on termination rates total welfare increases with respect to the common regulatory setup.