Brendan M. Cunningham and Peter J. Alexander, Information Economics and Policy, 22, 2010, 91-102.
We present a model of consumer and firm behavior in mobile markets in order to identify the role of termination charges in determining the market equilibrium. Our model predicts a "waterbed effect,' that is, high termination rates will be associated with low subscription prices, if preferences are the main source of variation in termination rates. If costs are the main driver of termination rates our model predicts a "tide" hypothesis in which high termination rates exist alongside high subscription prices. We test these predictions and find evidence that mobile termination rates are positive and significantly related to mobile phone adoption. We also find that competition, internet subscriptions, and a free press are positively associated with mobile phone adoption while fixed termination rates and inequality slow the adoption of mobile technologies.