Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks

Abstract:     
Can regulation solve problems arising from a natural monopoly? This paper analyzes whether "unbundling," referring to regulations that enforce sharing of natural monopolistic infrastructure, prevents entrants from building new infrastructure. It models and estimates a dynamic entry game to evaluate the effects of regulation, using a dataset for construction of fiber-optic networks in Japan. The counterfactual exercise shows that forced unbundling regulation leads to a 24% decrease in the incidence of new infrastructure builders. This suggests, therefore, that when a new technology is being diffused, regulation to remove a natural monopoly conversely involves risks that incumbent monopolists' shares will increase.

Number of Pages in PDF File: 41

Keywords: Unbundling, FTTH, Natural Monopoly, Dynamic Structural Estimation, Telecom

JEL Classification: K23, L43, L96

working papers series