Calling vs. Receiving Party Pays

Abstract

We provide a theoretical framework to analyse how the level of mobile termination rates (MTRs) affects market penetration. We compare market penetration and welfare between the Calling Party Pays (CPP) and the Receiving Party Pays (RPP) regimes. In addition to that, we provide policy recommendations to the regulator when choosing the level of the MTRs. Our results suggest that market penetration and welfare depend on the size of the call externalities (i.e. the utility that consumers obtain from receiving a call). With large call externalities, a Bill&Keep arrangement (i.e. MTRs set at zero, which is usually associated to RPP tariff regimes) implies higher usage and higher market penetration. This is because higher usage increases the utility of joining a mobile network, and consequently, more people would like to join a network.