Economic Effects of Indirect Access Regime in the Mobile Telecommunicaion Market

Abstract

This study investigates the economic effects that may be expected from the introduction of an indirect access scheme in Korea’s mobile market, a potentially effective tool for stimulating competition. We estimate changes in consumer surplus and operator revenues attributable to the indirect access system, using actual market data (or projections) related to price elasticity of demand, call traffic, prices and interconnection fees, and future competition scenarios. Our results indicate that the introduction of an indirect access scheme in Korea’s mobile market is likely to result in a substantial gain in consumer surplus. Our results also suggest that the social benefits of an indirect access scheme would be sizeable, regardless of its type, as long as its access pricing is based on a cost-plus or retail-minus model. Meanwhile, we found that, for an indirect access scheme to be able to effectively promote competition, access must be either priced on a cost-plus basis to guarantee viable revenue streams for newcomers in the mobile market, or according to a retail-minus model with appropriate discount rates. We also concluded that, to ensure the full effectiveness of indirect access as a competition tool, it may be necessary to make offering prepaid cards and unlocking the SIM card of the customers a mandatory requirement for all carriers.

Keywords: Carrier Pre-Selection (CPS), Indirect Access (IA), Network Neutrality, Retail-minus, Mobile Virtual Network Operators (MVNO)