Economic Of Entry And Telecommunications Regulation

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Slide 1

Economics of Entry and
Telecommunications Regulation

Simon Wilkie
Center for Communications Law and Policy
USC Law School

D.O.J. 2007 Telecommunications Symposium


Slide 2

Overview

  • Review of market definition & structure
  • Economics of Regulation/Deregulation
  • Issue 1 Bundled Products
  • Issue 2 Market Segmentation
  • Issue 3 Barriers to Entry
  • Issue 4 Wireless Entry

Slide 3

Market Definition

  • Challenges to traditional regulatory market definitions: Voice Cable TV Wireless
  • Bundled products what is the good?
  • What is market dominance in a bundle if competitors have different mix of products
  • Services versus access to networks
  • Market segmentation and price discrimination
  • Geographic market definition and deployment
  • Important to get the economics right!

Slide 4

Market Definition

  • What is the product?
  • Access versus Telecom Services
  • Wireless substitution
    • Minutes migration to wireless
    • No economic evidence of access substitution
  • VOIP versus POTS
    • Cable entrants and others deploying VOIP
    • Rapid adoption in last few years
    • Minute substitution
    • Number Portability Data suggests VOIP does not provide as strong a competitor for access as POTS
  • Premature Deregulation may harm consumers

Slide 5

Natural Monopoly Issues

  • Large Fixed Costs
    • Costs are “sunk” and not reversible
    • E.G. Verizon’s FIOS build
  • Average unit cost falling over the relevant range
  • “Dumb Pipe Paradox”
  • Should expect strategic behavior
  • 1996 Aims to replace regulation with competition
  • Naïve deregulation may fail

Slide 6

Issue 1: Bundled Products

  • Traditional Economic Model of Bundling
    • Bundle substitutes to raise “stand alone prices”
    • Bundled discounts
  • Not that relevant telecom services
    • Industry tells us driver is reduced churn
  • Increase the NPV of a customer even with no change in prices

Slide 7

Issue 1: Bundled Products

  • Model of “Viscous Demand” Radner 2003 JET
  • Consumers don’t always look at their bills
    • Transaction & Information costs
    • Consumers only churn if an “event” triggers re-optimization
  • Bundling increases the “shock threshold”
    • Consumers have to change 3 services not 1
  • Equilibrium with price dispersion
  • Means welfare analysis is tricky

Slide 8

Issue 2: Segmentation and Competition Raising Prices

  • Market composed of different segments
  • Entrant targets one specific segment
  • Leads to more differentiated products
  • All prices may rise
    • Consumers left behind not targeted by the entrant.
  • Welfare Analysis is not obvious

Slide 9

Issue 2: Segmentation and Competition Raising Prices

  • Theory: Chen and Riordan
    • Economics working paper CU Boulder
  • Case Study 1 DBS versus Cable
    • Goolsbee and Petrin working paper version 2001
  • Case Study 2 Broadband
    • Chen and Savage Working paper CU Boulder 2007
  • Case Study 3 Price Flexibility in California
    • Prices rises for basic services

Slide 10

Issue 3: Barriers to Entry

  • Interconnection
    • Agreements may be difficult
    • Delays entry and costly litigation raise rivals costs
  • Exclusive Provider Agreements
    • Master Planned Communities
    • FCC focused on Video but also applies to Telecom
    • Can exclude entry but speed deployment
  • Special Access Issues
    • Essential Input for telecom entrants
    • Incentive to raise rivals costs
    • FCC capped SBC VZ prices in 2005 mergers
    • Cap expires fear of price hikes and discrimination

Slide 11

Issue 4: Wireless entry

  • Limited wireless competitor for wireline access & broadband (Leap Metro PCS)
  • Long history of wireless entrant failure and exit
  • AWS auction; No significant new entry
  • 700 MHz auction: best opportunity for entry
  • Spectrum caps worked in 1994
    • Auction with no caps = Incumbent merging with entrants with no DoJ review
  • Caps in auction but not holdings
    • Transfers would lead to DoJ & FCC merger review

Slide 12

Summary

  • Market is evolving
  • New products, technology, and strategies
  • More economic analysis is required
  • Both naïve regulation and deregulation without analysis may harm consumers
Updated June 25, 2015

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