Background

We discuss policy towards call termination on mobile telephone networks, illustrated by the 2002 Competition Commission inquiry into the UK mobile market. This was an unusually complicated inquiry (the report was printed in three volumes). The case demonstrates the utility of employing stripped-down economic models to cast light on complex interactions between firms and consumers. Doing so reveals that, by and large, the findings of the Competition Commission and existing economic models are consistent, although we also highlight some points of divergence. In some cases these differences reflect inadequacies in the theory, which we will try to address, while in other cases they reflect statements by the Competition Commission – and especially by some of the mobile networks during the inquiry – which are difficult to reconcile with reasonable economic analysis.

The investigation concerned the call-termination charges levied by four mobile networks in the UK: O2, Orange, T-Mobile and Vodafone. Call termination refers to the wholesale service whereby a network completes (or ‘terminates’) a call made to one of its subscribers by a subscriber on another telephone network. Typically, the originating network pays the terminating network for completing calls. The wholesale price it pays is known as the termination charge. There are two broad kinds of call termination on mobile networks: termination of calls made from other mobile networks (termed mobile-to-mobile, or MTM, termination in the following discussion) and termination of calls made by callers on the fixed telecoms network (fixed-to-mobile, or FTM, termination).