the number of people they could call and hence increased the value of each network. The combination of calling party pays (CPP), which facilitated hand-set subsidies and pay-as-you-go, dramatically increased the rate of market growth compared to the US approach of receiving party pays (RPP), so that Mexico decided to switch from RPP to CPP in 1999, and then experienced an acceleration in market growth.

Such network externalities had been recognised in the earlier MMC inquiry and justified an additional subsidy financed by call termination. The main issue was how to allocate the fixed and common costs (including internalising this network externality). The Competition Commission supported Oftel’s recommendation that these costs should be financed by an equiproportional mark-up on all LRICs. The MNO’s argued for a Ramsey mark-up, which all parties accepted would be efficient if applied to all three mark-ups. $ ^{10} $ Ramsey mark-ups would be inversely proportional to market demand elasticities, and as these were lower for call termination than the other services, would justify a higher termination mark-up. Oftel argued that, $ ^{11} $ “even if termination charges were set at the Ramsey level, there would be no guarantee that MNOs would set their (unregulated) retail prices at the Ramsey levels. In Oftel’s view the key reason is that the retail market for mobile services is not effectively competitive. If the retail market were perfectly competitive and if termination charges were regulated at the Ramsey level, it would be expected that firms would set Ramsey retail prices. The intuition is that in a perfectly competitive market firms are forced by competitive pressure to set prices that maximise consumer surplus.”

The Competition Commission defended equi-proportional mark-up on essentially two grounds: that it was not fair to fixed-line callers to have a higher mark-up on mobile call termination, the benefits of which would flow back to subsidising mobile use, and that in any case the evidence for establishing the relevant demand elasticities was not sufficiently robust to justify a departure from equi-proportional mark-ups. The MNOs then appealed to the High Court for a Judicial Review. A judicial review of a Competition Commission case is essentially a test that the Commission had followed due process and given reasoned arguments for its conclusions, and does not as such normally reconsider whether the contestants’ arguments were more compelling. Justice Moses delivered his judgement in favour of the Competition Commission on 27 June 2003.

The case is interesting in showing the effect of this competition law approach on regulation, but it also raises some important and not properly resolved issues. On the positive side, although the case was brought before the Telecommunications Directives came into force, Oftel was already conducting its market analyses and basing its case for regulation on very similar principles, particularly in defining markets and determining whether they suffered from SMP. Second, the idea of confining regulation only to those markets suffering from SMP and leaving other markets to competition law has now been accepted. From 25