Competition and mergers in networks with call externalities

This paper considers a model of two interconnected networks with different qualities. There are call externalities in the sense that consumers value calls they send and receive. Networks compete in two part tariffs. We show that call externalities create private incentives for each competitor to charge low access prices. This result moderates the risk of tacit collusion when competitors can freely negotiate their access charges. We also analyze the case of a merger between the two networks and give conditions under which the merger can be welfare improving.

Competition and mergers in networks with call externalities

This paper considers a model of two interconnected networks with different qualities. There are call externalities in the sense that consumers value calls they send and receive. Networks compete in two part tariffs. We show that call externalities create private incentives for each competitor to charge low access prices. This result moderates the risk of tacit collusion when competitors can freely negotiate their access charges. We also analyze the case of a merger between the two networks and give conditions under which the merger can be welfare improving.call externalities; interconnection; mergers; telecommunications

Electronic communications regulation in Europe : an overview of past and future problems

For many years, electronic communications has been one of the most important areas of policy intervention or the European Union. Liberalisation and privatisation of the telecommunications industry were very important topics of the policy debate in the two decades from 1990 to 2010. In these years, the EU developed a sophisticated regulatory framework aspiring to the principle of favouring the entrance of new players in the sector and characterised by a strong pro-competition flavour. More recently, however, the necessity of mobilising important investments for the creation of new Next Generation Networks, capable of delivering all the benefits of the digital revolution to European citizens, has cast doubts on the validity of the established framework. This paper discusses the solutions adopted during the liberalisation process and summarizes some of the key future challenges to the existing regulatory framework

THE ECONOMICS OF MOBILE INTERNATIONAL ROAMING

International roaming is a hot topic in the telecommunications industry. Many countries have witnessed a downward trend in mobile domestic prices. On the contrary, international roaming prices remained reluctant to follow the domestic trend. In Europe, the service has been regulated with price cap since 2007, and regulation is maintained for years to come. The existing literature on the economics of international roaming has focused on theoretical modelling, which assumes a uniform retail price (i.e. common across visited networks). The main finding is that wholesale and retail prices rise with the number of visited networks. Additionally, vertical merger is found unprofitable; and home network steering does not cause downward pressure on wholesale prices. We found that the assumption of uniform retail pricing leads to results that are inconsistent with wholesale competition because visited networks appear in the demand as complements rather than substitutes. We present theoretical models that match the existing literature’s findings, and compare results to the case whereby the retail price is discriminatory (i.e. differs by visited networks). With discriminatory retail, substitutability of networks reduces prices, and the incentive for vertical merger exists. In a steering game, steering is found able to reduce wholesale prices; and networks alliances are formed in equilibrium. The empirical literature on international roaming is limited to few industry studies. We use an aggregated dataset on prices and quantities for networks visited by roamers from one major mobile provider whose subscribers travel a lot across the world, Etisalat. The study period witnessed a retail price shift from discriminatory to uniform. The main findings are: (1) competition, as measured by the number of visited networks, reduces wholesale price; (2) traffic steering is effective, especially towards preferred networks (alliance and cross-owned); (3) only alliance networks offer wholesale discounts; and (4) demand is more elastic than crude industry studies

Competition and mergers in networks with call externalities

Working Paper du GATE 2003-08This paper considers a model of two interconnected networks with different qualities. There are call externalities in the sense that consumers value calls they send and receive. Networks compete in two part tariffs. We show that call externalities create private incentives for each competitor to charge low access prices. This result moderates the risk of tacit collusion when competitors can freely negotiate their access charges. We also analyze the case of a merger between the two networks and give conditions under which the merger can be welfare improving.Cet article examine un modèle de deux réseaux de qualités différentes interconnectés. Il existe des externalités d'appels dans le sens où les consommateurs valorisent les appels qu'ils émettent et également ceux qu'ils recoivent. Les réseaux se font concurrence en tarif binôme. Nous montrons que les externalités d'appels créent des incitations privées pour chaque réseau à facturer l'accès à son réseau à un prix bas. Ce résultat modère le risque de collusion tacite lorsque les opérateurs preuvent négocier librement les prix d'accès qu'ils se facturent. Nous étudions également le cas d'une fusion entre les deux opérateurs et donnons les conditions sous lesquelles la fusion améliore le bien-être

Roaming in the Mobile Internet: when coverage sharing agreements call for regulation

Revised: 2006-06We examine competition in Mobile Internet services, when operators bargain over the coverage sharing and their reciprocal roaming charge. Results show that in equilibrium operators cover the overall territory entirely and no-duplication is chosen, no matter how their bargaining power is distributed: operators have aligned incentives to enjoy roaming revenues extra-rents. Only their relative stand-alone coverage and, therefore, their appropriation of these rents, can be affected by how bargaining power is distributed. We finally discuss the scope for regulatory intervention to reduce these rents in the forms of minimum coverage requirements, or control over the level of reciprocal roaming charges

Entry, investment and competition in telecommunications and media markets

This Ph.D. thesis builds on the new empirical industrial organization (NEIO) literature trying to use market data to determine fundamental market drivers such as demand parameters, entry and investment thresholds or the level and development of competition in the market. The thesis addresses two sectors: telecommunications (high-speed internet as well as fixed telephony) and media (newspaper sellers). It is divided in three articles 1) Geographic regulation and cooperative investment in next generation broadband networks A review of recent literature and practical cases This article reviews the theoretical and empirical literature on geographic regulation and co-investments in next generation broadband. Alternative telecom operators have continuously invested in their own infrastructure in recent years. After more than a decade since liberalisation, competitive conditions have substantially changed, especially in urban areas. European regulatory authorities have acknowledged this development by starting regional deregulation. Additionally, different forms of cooperative investments in next generation broadband have appeared on the market. The effects of such schemes on competition, investment and welfare crucially depend on the fine details of implementation. For instance, in the case of joint-ventures, it matters how investment costs are shared and how internal and external access prices are determined. In the case of long-term access agreements, it is essential to consider how access tariffs are structured, whether they can adapt to market developments ex-post and whether contracts are signed before or after the investment takes place. Generally, many of these agreements allow for some extent of risk sharing, offering the possibility to increase investment incentives when firms are not risk neutral. It is suggested that regulators consider introducing regulated co-investment agreements complementing current regulation or in some cases even substituting for it, in addition to considering geographically segmented access prices. 2) Entry and Competition in local Newspaper Retail Markets When two are enough This article estimates sustainable coverage and competitive effects of entry for Swiss newspaper sellers which sell composite goods, including a range of other products such as food and near-food items. It uses the applied entry threshold ratio methodology from Bresnahan and Reiss (1991), which allows estimation even when the range of products under examination is not exactly defined and when price and quantity data are not available. It is found that under monopoly pricing, single firm entry is sustainable in Communes with a market size of over 482 people (leaving 310 Swiss communes without a selling point). With duopoly prices, instead, a first firm would only be able to enter a market with a market size of 921 people (leaving another 263 Communes without coverage). There are therefore tangible benefits from above duopoly prices in monopoly regions. Thus, a clear and quantifiable trade-off between prices in monopoly regions and coverage exists. Moreover, it is found that a second entrant in this market strongly increases competition, while further entry doesn’t have significant additional competitive effects. From a welfare perspective, therefore, it can be stated that “two is enough” to ensure competition in this market. It is shown that this is not the case in some other retail markets, where entry by a third firm may still significantly affect competition. Finally, using these estimation results, it is shown that public policy, which consisted of having the Government controlled Swiss Post enter the newspaper sellers’ retail market, was not optimal as it was focused on urban areas where neither coverage nor competition could be enhanced, while risking competitive distortions. At the same time, it is shown that there are Communes in which such a Government policy may be welfare enhancing. 3) Competition and Market Strategies in the Swiss Fixed Telephony Market An estimation of Swisscom’s dynamic residual demand curve This article develops a market model based on a generalised version of the traditional “dominant firm – competitive fringe” model allowing the incumbent also more competitive conduct than that of a dominant firm. A system of simultaneous equations is developed and direct estimation of the incumbent’s residual demand function is performed by instrumenting the market price with incumbent-specific cost shifting variables as well as other variables. Unlike earlier papers that assess market power in this market, this paper also adjusts the market model to ensure a sufficient level of cointegration and avoid spurious regression results. This necessitates introducing intertemporal effects. While the incumbent’s conduct cannot be directly estimated using this framework, the concrete estimates show that residual demand is inelastic (long run price elasticity of residual demand of -0.12). Such a level of elasticity is, however, only compatible with a profit maximising incumbent in the case of largely competitive conduct (conduct parameter below 0.12 and therefore close to zero). It is therefore found that the Swiss incumbent acted to a great extent competitively in the fixed telephony retail market in the period under review (2004-2012) and that (partial) retail price caps in place can no longer be justified on the basis of a lack of competition

Is Federal Preemption Efficient in Cellular Phone Regulation

While many recent state-level efforts to regulate various aspects of the cellular phone industry have been abandoned in favor of federal regulations, other attempts by state regulators still exist. For this reason, Thomas Hazlett proposes that federal regulation is generally more appropriate than state-level action, due to the nature of the cellular industry. After a brief history of the industry, the author analyzes the pros and cons associated with state and federal regulation. The Article then proceeds to address the efficiencies created by national networks and proposes that the fragmentation of controlling regulatory power would reduce these efficiencies. Following a review of regulatory experiments, the author concludes that federal regulation is most appropriate and efficient, and that further state regulation of the cellular telephony could lead to undesirable balkanization of the industry