Tariff-Mediated Network Externalities: Is Regulatory Intervention Any Good?

Mobile phone networks' practice of charging higher prices for off-net than for on-net calls has been pinpointed as the source of two competition problems: underprovision of calls and permanent disadvantages for small networks. We consider these allegations and four different remedies: limiting on/off-net differentials or off-net margins, lower termination fees, and asymmetric termination fees. In all cases a trade-off has to be made between efficiency and networks' profits on the one hand, and consumer surplus on the other. Indeed, the total welfare effects of regulating on/off-net differentials are ambiguous and depend on demand characteristics.