the mark-up over LRIC is inversely proportional to market demand elasticities. Second, in a market where subscribers must choose between different suppliers to purchase the whole range of bundled services, effective competition in all service markets would force the suppliers to charge Ramsey prices for each service offered (i.e. subscription, making and receiving calls). Third, termination is a bottleneck service and thus not subject to the same competitive pressures as subscriptions and calling. Mobile operators can raise termination charges to fixed operators who are subject to regulation and unable to exercise countervailing power, and will have incentives to do so if the surpluses above cost thereby generated can be applied to fund competitive activities against other mobile operators.

Mobile operators also have incentives to raise charges to each other, since this disadvantages callers from other networks and encourages them to switch networks to the MNO charging the higher termination fee. This tends to over-reward mark-ups on termination relative to the efficient level. As a result, competitive forces will not ensure that MNOs set termination mark-ups to either fixed or mobile operators at Ramsey levels without regulation. Finally, new subscribers confer a network externality on existing mobile and fixed line subscribers, which they will undervalue in making the subscription decision. There is therefore a case for subsidising subscription relative to the incremental cost, and this adjustment forms part of the identification of appropriate Ramsey mark-ups.

If the remaining mobile markets are competitive, and if call termination charges are regulated at the Ramsey level, then all mark-ups would be set efficiently as though all services were competitive. Oftel disputed that the retail market for mobile services was competitive in its submission to the Competition Commission, but also accepted in its Market Review that the retail market was effectively competitive, in the sense that no MNO has SMP. That does not mean that the market corresponds exactly to the textbook definition of perfectly competitive (which, inter alia, requires constant or decreasing returns to scale, ruled out by the very need to recover fixed and common costs by a mark-up). It does mean that there are good reasons for not regulating that market.

This raises an important philosophical point. A welfare economist might argue that given one instrument (the mark-up in the regulated market), and one objective (maximise social welfare subject to private ownership, i.e. a profit constraint), the mark-up should take into account all market failures, including possibly imperfect competition in the mobile retail market. The whole thrust of the Communications Directives is that regulation cannot be justified if markets are deemed effectively competitive. That would seem to imply that regulators should not be able to leverage their authority to regulate some markets into other markets that are not subject to regulation (because they do not exhibit SMP). As regulation is costly (particularly in dynamic markets), it is only justified where there is no suitable competition law remedy. Competition law does not aim to make all markets perfectly competitive by assuming that it is costless to intervene, but leveraging regulation into other markets to improve their workings would seem to come very close to trying to achieve efficiency in these other markets which are almost, but not quite, competitive.

Another way of putting the same point is that the key principle of British regulation of network utilities is that competition should be encouraged where possible, and where natural