Wholesale Pricing, NGA Take-Up and Competition

Abstract

Our market modelling approach aims at practically determining wholesale pricing policies for the switch from copper to fibre access networks. It asks which market equilibria for incumbents and entrants result from different combinations of copper and fibre wholesale access charges. We first calculate the relevant costs and the cost drivers for a representative European country which we call "Euroland". Network costs are derived for the investor and for competitors who base their business model on purchasing access from the incumbent. The cost modelling results feed into a model of competition between copper and Fibre to the Home (FTTH) with multiple competitors in order to capture aspects of the transition from copper to FTTH. We show the impact of wholesale prices for copper and fibre access on competition, retail prices and investment. The incentives for a switch from copper to fibre are largely preserved by an equal absolute reduction of both copper and fibre access charges and they are increased if the copper access charge is reduced by more than the fibre access charge. We find in a relatively simple calibrated model of competition for broadband service that substantial care must be taken in regulating the prices of inputs which are substitutes. In this calibrated model, small errors in the absolute price difference between these (even when the absolute level of one or the other price is correctly set) can lead to suboptimal outcomes. Our central result is that significant fibre investment can only be expected if the structure and level of wholesale prices is properly balanced.

Keywords: Next Generation Access, FTTH, cost modelling, GPON, P2P, competition, welfare

JEL Classification: L96, L5, L51