Essays on Competition and Regulation in Telecommunications

Bruno Wertlen

Date of defense: May 31, 2004

Dissertation Committee:
Andreas Ortmann - CERGE-EI, chair
Avner Shaked - University of Bonn
Jan Hanousek - CERGE-EI

Abstract:

In my thesis, I attempt to address some of the major issues in price competition and regulation in fixed and mobile telephony, and also the Internet, emerging at the outset of the new century. Specifically, I deal in three dissertation chapters (composed as stand-alone papers) with some of the crucial topics in telecoms competition and regulation mainly with respect to the second generation and third generation mobile networks. Firstly, I explore a regulation of interconnection charges and its impact on a competition in fixed and mobile networks in the stylized setting of a competition between an integrated fixed and mobile network and a stand-alone mobile network. Secondly, we analyze the economic incentives of mobile operators for the adoption of the third generation (hereinafter, 3G) mobile technology with the focus on heterogeneity in 3G products valuations and a critical mass of consumers. Thirdly, competition for coverage when providing mobile Internet services with a 3G mobile (once adopted) or a wi-fi technology is examined. In addition to these three chapters with a purely telecommunications focus, the thesis also contains one chapter with a more general topic from the area of industrial organization that deals with multi-product price competition in the Hotelling model. Below I briefly describe the research objectives of each chapter.

The first essay briefly discusses a simultaneous price competition with two and more products emphasizing a particular feature of multi-product Hotelling model that has not, to the best of my knowledge, been explored yet. This feature is then set in the context of bundling and branding practices, which are commonly used in telecommunications, but also in other industries. More specifically, this chapter explores multi-product price competition in a Hotelling model when consumer preferences over products are correlated. I show that the total price for a bundle of products is the sum of transportation cost of both products when the products are perfectly correlated, whereas the price of a bundle depends only on the transportation cost of the more differentiated product when consumer preferences are independent. I also discuss possible business strategies for multi-product firms that could exploit this fact.

The second essay is devoted to one of the regulatory pricing issue related to networks, which is the price of access to the services provided by different networks or, in telecom terminology, the price of network interconnection. This chapter explores fixed and mobile telephony competition in telecommunication markets when fixed and mobile network providers are jointly owned by the incumbent fixed network. I show in a simple model that collusion in retail prices in mobile networks is likely to occur and that the regulation of both fixed-to-mobile and mobile-to-fixed network interconnection charges is socially desirable. It is argued that besides simple cost-based access charges also the access charges based on the "aggregate cost of access" can also be justified.

In the third essay, based on a joint piece of work with Simona Fabrizi, the incentives for networks regarding the adoption of third generation (3G) mobile Internet technology are explored. The focus is on the role of consumers' preferences in determining a choice as to whether to upgrade a technology. We show that if all consumers far prefer the upgraded services compared to the traditional ones both network operators would decide to upgrade their technology. However, when consumers differ over their preferences for these upgraded services, the network operators may both decide to adopt the new technology, or both retain to the old, or possibly one mobile operator may adopt it while the other does not. The results depend on the difference between the relative proportion of each type of consumers if compared with the net gain of providing the services. For some ranges of these parameters we can also describe an equilibrium in which the operator who decides not to upgrade earns higher profits compared to those of the operator who chooses to upgrade. This study contributes to an understanding of different outcomes of bidding or "beauty contest" procedures for awarding 3G licenses across European countries in 1999 - 2001.

The fourth essay, another joint study with Simona Fabrizi, naturally extends the work on the upgrading of mobile technology and posits a probable scenario of the competition between mobile operators using third generation networks. The paper admits Mobile Internet operators to cross-access each other networks in exchange for the payment of a reciprocal roaming charge. While there is competition over coverage and for market shares, the analysis shows that a continuum of equilibria exists in which operators tend to always guarantee the coverage of the entire territory. In particular, an equilibrium may exist in which both operators would each entirely cover the available territory, both thus being worse off. This outcome is worse than those that may arise from any other possible sharing of the overall territory between them. In fact, any non-degenerate case such as this one - even when there is some overlap between the territories covered by each of them - provides extra-rents to operators that come from the roaming revenues. Scope for regulatory intervention arises whenever there is a risk that a focal-point effect could help operators to select the type of equilibria they would like to dominate. The control over a minimum coverage requirement, or the level of the roaming charge itself, could be effective tools for the regulatory agency to avoid such types of equilibria occurring.