Network Asymmetries and Access Pricing in Cellular Telecommunications

Network shares and retail prices are not symmetric in the telecommunications market with multiple bottlenecks which give rise to new questions of access fee regulation. In this paper we consider a model with two types of asymmetry arising from different entry timing, i.e. a larger reputation for the incumbent and lower cost of servicing for the entrant as a result of more advanced technology. As a result firms have divergent preferences over the access fee. In case of linear and non-linear prices the access fee might still act as the instrument of collusion, but only if a side-payment is permitted which is generally welfare decreasing. Moreover, in contrast with the European regulatory framework, the access fee on the basis of termination cost might not necessarily be a socially preferable solution.cost asymmetry, brand loyalty, imperfect competition, network interconnection, access fee

Competition and access price regulation in the broadband market

We construct a model for differentiated Cournot competition between service-based and infrastructure-based firms, out of which one infrastructure-based firm (the incumbent) supplies to the service-based firms. We seek for and compare the socially optimal and the incumbent’s profit maximizing access price in two scenarios: (i) service-based firms and incumbent supply homogeneous services (partial differentiation), and (ii) all services are horizontally differentiated (uniform differentiation). We show that in both cases the incumbent never forecloses service-based firms if infrastructure-based competition is present or if services are somewhat differentiated. Under uniform differentiation the welfare optimizing access price is below marginal cost, hence the incumbent subsidizes the production of service-based firms and makes zero profit. In the case of partial differentiation, the same result obtains when both markets are concentrated. However, if markets are not concentrated, the socially optimal access fee exceeds the marginal cost.

Optimal regulation under unknown supply of distributed generation

As distributed generation (DG) continues to expand, larger low-voltage networks will be required in the future. However, regulated distribution network operators (DNOs) need to invest in new infrastructure without knowing a relevant determinant of network costs, the future amount of DG. Due to uncertainty, optimal network capacity needs to reflect the expected demand for capacity over all possible DG states. Therefore, not all capacity will be used if a low level of DG occurs. Optimal regulation that is set under asymmetric information about future DG needs to create incentives for the DNO to invest in this 'excess capacity' and also encourage optimal network utilization. In this case, an option menu that includes fixed fees and positive network charges on DG-producers fulfills these requirements and implements the first-best optimum. On the contrary, price-cap and revenue-cap regulation lead to either underinvestment or high information rents to the DNO.

Concurrentie, innovatie en intellectuele eigendomsrechten in software markten

This study analyzes under which circumstances it may be desirable for the government to stimulate open source software as a response to market failures in software markets. To consider whether policy intervention can increase dynamic efficiency, we discuss the differences between proprietary software and open source software with respect to the incentives to innovate and market failures that may occur. The document proposes guidelines to determine which types of policy intervention may be suitable. Our most important finding is that directly stimulating open source software, e.g. by acting as a lead customer, can improve dynamic efficiency if (i) there is a serious customer lock-in problem, while (ii) to develop the software, there is no need to purchase specific, complementary inputs at a substantial cost, and (iii) follow-on innovations are socially valuable but there are impediments to contractual agreements between developers that aim at realizing such innovations. This publication is in Dutch.

Vertical foreclosure: a policy framework

Whenever you phone your mother, switch on the light, or buy health insurance you purchase a service or product from a chain of vertically related industries. Providers of these products or services need access to a telecommunications network, an electricity network or to health care services. In such industries, integration and exclusive contracts between vertically related firms may have important welfare enhancing effects, but can also deny or limit rivals' access to input or customers, leading to foreclosure. Foreclosure can harm welfare if it reduces competition. This document provides policymakers with a framework to assess the potential for welfare reducing foreclosure of vertical integration and vertical restraints and describes possible remedies. The framework consists of four steps. Each step requires its own detailed analysis. First, market power should exist either upstream or downstream. Second, a theory of foreclosure should be formulated that explains why foreclosure is a profitable equilibrium strategy. Third, the existence and magnitude of potential welfare enhancing effects of the vertical restrains or vertical integration should be assessed. Fourth, suitable policies to address foreclosure should be found.

Relation entry, exit and productivity: an overview of recent theoretical and empirical literature

This document provides a review of recent theoretical and empirical literature on the relationship between entry, exit and productivity. Decomposition methods show that entry and exit considerably contribute to productivity growth, but are unable to shed any light on the ultimate sources of productivity growth. However, the theories discussed do provide options for effective policy instruments. We argue that productivity or welfare should be the aim of policy and not the number of entrants, the intensity of competition or the amount of innovation expenditures. Taking a welfare approach, we address market failures with respect to entry. The most eminent market failure is market power of dominant incumbents. Lowering institutional entry barriers economy-wide is a promising policy option for further consideration. Whether such a policy measure actually improves social welfare depends also on the extent of other failures. Therefore, an ex ante cost-benefit analysis needs to precede intervention.