The Welfare Effects of Banning Off-Net/On-Net Price Differentials in the Mobile Sector

The off-net/on-net price differential in mobile voice observed in many countries is much larger than what can be explained away by standard economic theory. This situation has generated important anticompetitive concerns, leading some authorities to contemplate (and even impose) a ban on such practice. In this paper I propose a model of the mobile industry to simulate the welfare impact of this regulatory intervention. This ban will force the market to offer prices that do not depend on what network the call is terminated thereby increasing current on-net prices and decrease current off-net prices. Thus, the effect of the policy (for both consumer as well as producer welfare) is a priori ambiguous. The main feature of the model is that it simulates consumer and producer welfare under any ex-post undifferentiated price (average across all plans). Importantly, the model allows policy makers to determine the maximum ex-post undifferentiated market price that would guarantee no consumer welfare loss. I illustrate the model using results from Chile where the competition authority recently banned this practice