Customer ignorance, price cap regulation and rent-seeking in mobile roaming

Abstract

Mobile phone usage when travelling abroad is expensive. In contrast to domestic voice call prices, entry of new firms does not put a downward wholesale and retail price pressure on mobile usage abroad. The network connection switches frequently between available networks, and the choice of network has largely been independent of wholesale prices. As a consequence, the wholesale prices are strategic substitutes. The recent European price cap regulation does not solve this underlying problem, and there may be a permanent need for regulation analogous to what we have for domestic call termination. This should be a cautionary tale to the authorities whose goal is that the price cap regulation should be temporary. We show that there is also a risk that wholesale price cap regulation stimulates wasteful rent-seeking activity.