Entry in Telecommunications' Markets
26 Pages Posted: 30 Jan 2012
Date Written: August 2011
The deployment of Next Generation Networks (NGNs) is attractive from both technical and social perspectives, but market forces may not suffice to trigger the desired levels of investment. Cave (2004) and the European Commission (2010) describe how National Regulatory Authorities (NRAs) have adopted different policies to support NGN deployment worldwide. However, Cambini and Jiang (2009), Guthrie (2006) and Valletti (2003) show that a clear linkage between the existing regulatory mechanisms and their impact on incentives for investment is hard to establish.
As discussed by (Ferreira and Regateiro 2008), Geographically Segmented Regulation (GSR) – application of sub-national regulatory regimes – is a regulatory framework that can be used to create incentives and controls for the deployment of NGNs. The spirit and scope of GSR are broad, but so far most of the discussion focuses on the interaction of GSR with the regulation of wholesale telecommunication markets. Coincidently, the analysis of the dynamics of wholesale telecommunication markets has been a particularly hot topic in telecom policy research since the introduction of the 1996 Telecom Act in the U.S (Armstrong, Doyle et al. 1996; Laffont and Tirole 2001).
The purpose of this paper is to study how the price of wholesale together with the enforcement of a GSR framework might impact the deployment of NGNs. We present a game theoretic model that determines the number of infrastructure providers and virtual firms that enter green-field regions as a function of the wholesale prices set by the regulator. Firm entry occurs in multiple markets characterized by the demand for telecom service and the costs to deploy the appropriate infrastructure to meet demand. The latter are largely determined by household density.
We use this model to analyze several types of regions where NGNs can be deployed - rural areas, urban areas and downtown areas. By predicting how many firms are likely to enter each market, our model provides fundamental information for regulators to decide the best type of policy a region might require to ensure availability of telecommunications service: if no entry occurs the region is a candidate for universal service; if only one provider deploys infrastructure, the region might require wholesale regulation; when two or more providers deploy infrastructure, competition is likely to emerge.
Using engineering data from publicly available sources such as (Banerjee and Sirbu 2006), (Sigurdsson H. 2006) and (Wittig, Sinha et al. 2006), and a simulation software we developed, we show how different wholesale prices can determine the competitive nature and structure of telecommunications markets. We show that low wholesale prices can attract a disparate number of virtual providers that erode the profitability of infrastructure providers and their incentives to invest. We also show that high wholesale prices can deter the entry of virtual providers and incentivize investment, but will not necessarily maximize welfare which can be higher in situations where a single provider invests in infrastructure opening his network to virtual providers at reasonable prices.
We show that highly populated areas are likely to develop into competitive telecommunication markets while regions with low household density will only see very limited investment in network infrastructures and little or no competition. Such asymmetries make the case for GSR persuasive, but we show that supply side interdependencies among markets make the implementation of GSR a non-trivial task. We prove by example that changes in regulation in very competitive markets can have negative consequences in interrelated, but less competitive market. Furthermore, we show that the “n-plus” rule of thumb criteria used to guide many real world GSR cases may lead to severe consumer welfare reductions.
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