Abstract - Vodafone

10
On-net Pricing in Mobile Moving the debate forward • The Policy Paper Series • Number 8 • April 2008
fixed costs and increased functionality). First fixed and then
mobile operators have tried to satisfy this demand through
virtual private networks using tariffs rather than physical
private networks because of cost of build and duplication
of existing infrastructure. Vodafone’s mobile VPN product
is simply a mobile copy of the fixed product that was
developed by fixed operators like Telefonica. Cheap or
free on-net calls are an integral part of a VPN product for
customers and without them the product would not exist
and an identifiable and substantial demand from business
customers would not be met.
Indeed, as argued in section 2 above, given the existence of
large fixed up-front costs, low marginal costs and significant
scope economies, it makes sense -from the point of view
of the operators- to reflect their own cost structures in
the pricing of services by offering bundles of services to
customers and quantity discounts. This is the same for both
fixed and mobile telecoms services.
Moreover, since many of the services are complementary
in use, there are significant network effects and there are
a variety of customers with different market needs, it will
also be economically rational and efficient for the operator
to establish a diverse set of pricing plans and alternative
contracts to meet the varying needs of different customers.
A customer who buys 1000 minutes a month will clearly
want a different tariff to the occasional caller who buys just
10 minutes a month.
These pricing schedules, which are based on different
combinations of fixed fees and per unit prices, accommodate
the different preferences of clients and allow the legitimate
internalization of network effects by the operators, to
the benefit of both the customers and the producers.
The companies are rightly interested in developing these
pricing schemes, since they will lead to a higher and more
efficient utilization of the network.
Economic efficiency is improved, thus, on both accounts.
On the demand side, non-linear tariffs allow the satisfaction
of customers with different demands and willingness to
pay for different amounts and types of telephony services.
On the supply side efficiency is improved also, since the fixed
network costs are financed through fixed fees unrelated to
consumption, and this implies that per unit fees get lower
when average costs also drop. To effectively outlaw such
products would drastically reduce efficiency and customer
choice for both mobile and fixed services and, most
importantly, increase prices.
Overall, the analysis of the market indicates that competition
in the mobile segment remains vigorous. The facts of the
market show that the behaviour of mobile operators is
not driven by the activities of fixed operators but by fierce
competition from the other mobile operators. Any potential
impact on fixed operators is irrelevant to the case in hand and
should not be a concern of competition policy or regulation.
Notes
1 This company has a product “TalkTalk” which offers free on-net prices.
Other examples of extremely low on-net prices include Telfort (Netherlands),
Meteor (Ireland) and Orange (Denmark).
2 Information provided by Vodafone Spain. It corresponds to Vodafone customers.
3 Related mobile-fixed deals were announced in May 2004 in other markets. In the
USA between ATT and Sprint, and in the UK between BT and Vodafone.
4 The countervailing buyer power of business customers has been one of the
factors considered by the UK regulator Ofcom in its recent decision on some UK
pricing practices similar to the ones analysed in this article. The UK regulator finds
that the practices do not constitute an abuse. Apart from buying power, other key
determinants that lead to this conclusion are the extent of rivalry in the overall
mobile market and the fact that the practices do not appear to have had any
material effect in the market (Ofcom, Case: CW/00615/05/03, 21 May 2004).
5 The failure to win substantial market share could also be the result of an
aggressive competitive reaction by the incumbent fixed network operator. If that
is the case, it is certainly a reflection of a competitive environment,