Mobile termination: Zero is a good place to start

Last week I did an interview with Phil Dobbie for CommsDay on the ACCC’s approach to the setting of rates that carriers pay each other to terminate calls. I argued — as I did 15 years ago — that marginal cost rather than Total Service Long-Run Incremental Cost makes more sense and will generate more welfare without cutting investment incentives. It has the advantage of being a light-handed approach, computationally easy to calculate and good for consumers. And if you are concerned about Telstra not having incentives to build out mobile networks in regional areas remember they do get a virtual monopoly on customers in those areas so they are hardly suffering.

I’m about 8 minutes in.

At one point I talk about asymmetry in network size and whether that matters. As Philip Williams pointed out years ago that argument is a red herring. To see that, suppose that one network is 99% of the customers and another network has 1% of the customers. Suppose that customers call people independent of what network they are on. That means that the share of calls made to the customer on the small network is 1% while the probability that a customer on the small network calls someone on the large one is 99%. So the total amount of termination revenue earned by the small network is 1% times 99% times the termination charge while the termination revenue earned by the large network is 99% times 1% times the charge. It is easy to see that the termination revenue earned by each network is exactly the same. Thus, having a higher charge does not favour or discriminate against the larger network.