Yet more on Caller Pays vs Receiver Pays

A few weeks ago I made a short mention of problems with the calling party pays (CPP) model for mobile phone service as part of a post on telecom regulation.  That post generated some heated comment, so I elaborated a few days later.  The more complete explanation only generated more comment.  But it also resulted in an excellent referral from Usman Latif a.k.a. Techuser who pointed out a brand new paper by Professor Stephen Littlechild, "Mobile Termination Charges: Calling Party Pays versus Receiving Party Pays" in Telecommunications Policy, Vol 30/5-6 pp 242-277. A copy is online here:
http://www.econ.cam.ac.uk/dae/repec/cam/pdf/cwpe0426.pdf.  The on-line text says it's preliminary and not to be cited, however I inquired of Professor Littlechild who said, with the paper accepted for publication, that prohibition no longer holds.

Professor Littlechild provides a comprehensive study of the issue, with up-to-date footnotes citing an array of other economics and regulatory literature.  Some extracts:

In many countries there is widespread concern at the level of mobile termination charges. This is attributable to the bottleneck monopoly created by the Calling Party Pays (CPP) principle. It has led to increasingly severe price controls on termination charges. Regulatory experience in the three foremost such countries (UK, Australia and New Zealand) suggests that price controls are of limited effectiveness in aligning termination charges with costs, that net welfare gains from controls are small and that costs of setting controls are high.

The Receiving Party Pays (RPP) principle, which applies in North America and several Asian countries, avoids the bottleneck monopoly problem.  ... average revenue (price) per call is significantly lower with RPP, average minutes of usage per subscriber are significantly higher, and mobile penetration rate is not significantly different.

Usman's email included his experience in Pakistan:

Yesterday, I got a WLL connection from PTCL and noticed that WLL connections were selling like hotcakes. The reason according to the salesperson was the reduction in the price of CDMA handsets. According to the salesperson, PTCL had dropped the price of CDMA handsets from close to Rs. 4000 to Rs. 2000 two days back and since then there had been a huge spike in sales.

From this experience, and my prior observation as to poorer folk using used handsets, I have to say that the initial cost/effort of acquiring a telephone connection is the most important factor determining teledensity in a developing country. People always figure out ways to keep their phone bills low by economizing on the use of phones, but if the initial cost of acquiring a connection is high, they prefer to stay away. Consequently, I believe CPP had absolutely nothing to do with the astronomical increase in the number of subscribers in Pakistan, and the drop in government taxes on new mobile connections had everything to do with it.

Pakistan's current rate of increase in teledensity appears to be the fastest in the world. But the timing (early 2005) doesn't match CPP.  As I commented back in December,

…real changes happened in 2004.  First, in April the government granted two more licenses < thus six competitors>.  Telenor won one of those licenses, built a network and launched services in February 2005.  Warid won the other, launching services in April 2005. Second, in June 2004 the government abolished the remaining restrictions on foreign direct investment permitting foreign investors to retain 100% equity in their investments.  And third, they dropped the activation tax to Rs. 500 (~ $ 8) <from Rs. 5000 in 2001>.

Comments

[Allen Kamp]

The RPP model is a hinderance to the click-to-call products on the web. Where-by the user enters their number on the website and the system generates a call linking the merchant and the client. In such cases the merchant wishes to foot the bill for the call to the client as a "customer service". Unfortuanately whilst the merchant is able to say this a Free Call in all CCP systems, it loses its "Customer Service" angle in the RRP model because it incurs expense on the client.

some click-to-call examples
http://www.google.com/help/faq_clicktocall.html
http://www.wecallyounow.com (yes, I work for this one)

[brough]

Allen, just as "free phone" services arose in the PSTN, it would be reasonable for mobile operators to offer businesses the inverse, i.e. a service which delivers calls to RPP mobile subscribers at no expense to the subscriber. Assuming there are others like you and, given mobile is typically much more competitive than fixed line services, it's likely such a service will appear.
In any event, in the case of CPP vs. RPP, market forces seem much better for all concerned than government regulation.