VoIP under the EU regulatory framework : preventing foreclosure?

Abstract

In June 2004, the European Commission (EC) issued an "Information and Consultation Document" (European Commission 2004) that discussed how the Regulatory Framework of the European Union (EU) should be adapted to accommodate Voice over IP (VoIP) and invited relevant parties to comment on the Consultation Document. In our study, we use the responses of the different market parties to identify how incumbents seek to foreclose the market for VoIP telephony. From these responses we conclude that foreclosure is not only attempted by setting high prices for the use of infrastructure, but also by the strategic choice of infrastructure technology, which raises the cost of entry. We label the latter form of foreclosure "technological foreclosure" – as opposed to "market foreclosure". A simple modeling exercise shows that regulators seeking to avoid market foreclosure might trigger technological foreclosure. We argue that this has happened with the unbundling of the local loop in the EU, and that it might happen again with the transition to VoIP. We conclude that the current rights and obligations assigned to telecom companies effectively protect incumbents from competition by VoIP entrants. Moreover, the inaction of regulatory authorities when it comes to numbering and communication protocols is advantageous for incumbents and might obstruct the provision of new services in the future