Termination Rate Regulation and Retail Outcomes: Pass-Through and Competition in Botswana’s Mobile Market

Abstract This study examines the effects of termination rate regulation on retail outcomes and competition in Botswana’s mobile market. Using quarterly operator level data for 2006Q1–2016Q2, estimates from panel instrumental variable approach show that a 10% reduction in M2M termination rates lowers average subscriber expenditure by approximately 2.7%, indicating partial pass through and little evidence of a strong M2M waterbed effect. In contrast, lower F2M rates are associated with higher ARPU, suggesting a waterbed response. The contrasting effects support the diminishing waterbed hypothesis as mobile traffic becomes increasingly dominant. Results from the demand estimation indicate that estimated demand is elastic with respect to average subscriber expenditure. The average own-demand elasticity in relation to subscriber expenditure for the dominant operator is -1.57, smaller in magnitude as compared to -2.22 for Orange Botswana and -1.92 for beMobile. Lastly, the study finds that the policy to reduce termination rates had an increasing effect on competition in the mobile telephony market. The estimates indicate that the regulatory intervention was associated with a 13.9% reduction in market concentration, as measured by the HHI. The findings suggest that termination rate regulation can improve consumer welfare and market competitiveness without generating substantial adverse retail market effects, particularly in markets where F2M traffic has become a secondary component of telecommunications revenues, with operators increasingly dependent on M2M and data services.