Changing from CPP to RPP

Because the application of CPP (‘calling party pays’) is a central cause of monopoly power in call termination markets, a comparison with RPP (‘receiving party pays’) should get prominent attention in discussions on remedies.²⁵³ Unfortunately, this is not the case, as policy makers give much more attention to price controls.

RPP does not mean that the calling party does not pay at all. Neither does it automatically mean that receiving calls is costly – it only means that the price for receiving calls (the

‘reception charge’ or ‘receive price’) is not a priori fixed at zero because of some convention in the market. Also, the calling party still pays a price for call originiation.²⁵⁴ Accordingly, RPP actually means that the caller and called party share the cost of a call,

253 RPP is known as MPP (‘mobile party pays’) in the US.

254 Note that in principle, operators may decide to offer these services for free. For instance, if reception charges are set at zero, while call origination prices are positive, a situation of RPP effectively coincides with CPP.

where the balance of cost sharing is endogenously determined in accordance with the prices set by operators.

Note that CPP and RPP are nothing more than commercial arrangements with customers.

A major advantage of RPP is that it remedies the distortions of call termination monopolies, and consequently, it makes price controls unnecessary (Doyle and Smith, 1998, Littlechild, 2004, and see also section 5.1 on the model adaptation of Armstrong, 2002). RPP encourages mobile operators to compete for call termination, a service which is part of the bundle purchased by mobile end-users (the salient difference with a CPP regime). Thus mobile termation charges would be subject to competitive (downward) pressure. In the US, for example, the average mobile access price in 2002 was equal to $ 0.005, roughly the size of the average fixed access price, compared to an average mobile access charge of $ 0.16 in Europe.²⁵⁵ Marcus (2004) argues that RPP is an important element that contributes to lower mobile prices per minute of use, but it must be understood in the broader context in the US. Nevertheless, RPP does not give rise to call termination monopolies, while CPP does.

A welfare effect of RPP that has recently received some attention is related to the efficiency of calls (see Littlechild, 2004, for an informal discussion, and see section 5.1 for papers based on formal models). Define the net value of a call as the utility derived from the call minus its price. Note that for any payment regime, a call that is made will always create net value for the calling and the called party.²⁵⁶ If not, the call would not take place, as it could be ‘vetoed’ by either party. However, if the caller derives a lot of value from a certain call but the called party doesn’t, then RPP may prevent a call that would create positive aggregate value from happening. Similarly, CPP can lead to an

255 According to the Eight Annual Report by the FCC, cited in Crandall and Sidak (2004, p. 16). It must be noted that in the US, mobile operators are allowed to charge a reciprocal access price to compensate for the incremental cost of call termination.

256 Ignore the nuisance from receiving an unwanted call that is terminated immediately. Such disutilities can be avoided if handsets display the number of the calling party, or simply charging callers only for the first few seconds of every call.

efficiency loss when the called party highly values a certain call while the caller doesn’t.

It will be hard to empirically estimate these types of efficiency effects of RPP and CPP.

Nevertheless, some conclusions can be drawn without empirical data. Recall that CPP puts the financial burden – which is inflated because of call termination monopolies – completely on the calling party, while RPP leads to a split of the charges incurred by consumers. Even though this split need not be exactly in proportion to the underlying costs of call origination and termination, it is likely to lead to a smaller number of

‘unoccurring’ calls that would create aggregate value if they were made. Also, the split of the financial burden is unlikely to be distorted by underlying market failures, as in the case of CPP. Hence, from a welfare viewpoint, RPP may lead to superior results. The main reason is that RPP supports the internalization of call externalities that occur when subscribers positively value receiving calls.

Section 5.1 contained a discussion of some recent theoretical papers on the welfare effects of RPP. Let us recall here that various recent papers show that positive reception charges can improve welfare (in terms of the efficiency of calls). Since this result is obtained under specific assumptions, for instance related to the decision to make a call or to wait until one is being called, there is no guarantee that this would occur in reality.

Nevertheless, it seems safe to say that RPP is unlikely to harm welfare, to formulate it carefully.

Implementing RPP has some disadvantages, however. Of course, there is an implementation cost. Since a change to RPP is a discrete, one-time only event, requiring adaptations in the system that handle information about customers, calls and billing, the implementation cost should not be a major concern, compared to the costs of more heavy-handed interventions. Another objection to RPP, also of transitory nature, is the fact that consumers will have to get used to a new way of charging for calls, and that some of them (e.g. those without fixed telephones) may dislike a system of RPP. Overall, the disruption from changing to RPP does not seem to pose a heavy burden.

A potential disadvantage of RPP, which is worrysome at least at first sight, is that mobile users may switch off their handsets, and also keep their phone numbers secret, in order to avoid being charged for incoming calls. These are legitimate concerns, but unfortunately it is hard to empirically assess the size of such effects.²⁵⁷ Experience in the US, however, suggests that mobile subscribers in an RPP regime use their phones much more often than users in CPP regimes.²⁵⁸ It should be noted that it is not just RPP, but also the introduction of ‘bucket plans’ (i.e. charging a flat fee for a certain number of call minutes, which are purchased in advance by customers) by mobile operators to encourage their subscribers to use their phones more often, that led to higher minutes of use per subscriber. Before the diffusion of bucket-plans, apparently it was common to avoid giving out mobile phone numbers. Nevertheless, the introduction of innovative price structures endogenously depends on the RPP regime. Therefore it seems that the risk that mobile users switch off their phones is mostly theoretical.

As argued by Doyle and Smith (1998) and Littlechild (2004), compared to implementing price controls (which will be discussed in the next section), a change to RPP seems to be superior.²⁵⁹ It is like curing a disease rather than eliminating the symptoms. Not only does it lead to the desired effects (elimination of distortive prices, elimination of cross-subsidies from the fixed to the mobile sector), it reaches these effects without prolonged and intrusive interfering in the market.²⁶⁰

257 See Littlechild (2004) for brief discussions of several case studies in developing countries.

258 See a discussion of empirical data in Crandall and Sidak (2004) and Marcus (2004).

259 To the best of our knowledge, there are no legal impediments for EU member states to switch from CPP to RPP.

260 It is hard to understand why it has not been selected among other candidate remedies by Oftel and the Competition Commission in the UK. Littlechild (2004) cites an interesting statement made by Oftel in 2002: “In Oftel’s view, existing mobile users would react strongly against having to pay to receive calls. Oftel would have a hard job explaining that overall it was in their interests to pay for such calls when previously they received them for free. Oftel believes that MNOs would also be likely to criticise the changes, lobby against them, and blame the CC and Oftel for their introduction. The political outfall would be considerable” (p. 18).

Mobile operators would probably have to be forced to switch to RPP-based commercial arrangements with their customers. Given the (apparently) high revenues from call termination on their networks, they are unlikely to be in a hurry. According to Wright (2002), mobile operators will probably never choose to implement RPP if mobile termination charges are unregulated. Hence it may be necessary to mandate a switch to RPP for all operators. Can this be done in a simple way? An indirect way of doing this (which requires further consideration for policy purposes) is to regulate mobile termination charges at zero.²⁶¹ This type of price control requires neither cost monitoring by the regulator nor adjustments over time (as in the case of RPI–x price caps); hence it is very simple to implement, something which cannot be said about price controls in general. By doing so, mobile operators at once lose all their access revenues. Having lost their funds to cross-subsidize mobile retail prices, they will then have strong incentives to rebalance their retail prices, which may lead to a positive reception charge.²⁶²