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Entry, Investment and Competition In Telecommunications and Media Markets

 |  December 17, 2013

Posted by Social Science Research Network

Entry, Investment and Competition In Telecommunications and Media Markets by Roberto E. Balmer (University of Rome I – Faculty of Economics)

This Ph.D. thesis builds on the new empirical industrial organization (NEIO) literature trying to use market data to determine fundamental market drivers such as demand parameters, entry and investment thresholds or the level and development of competition in the market.

The thesis addresses two sectors: telecommunications (high-speed internet as well as fixed telephony) and media (newspaper sellers).

It is divided in three articles:

1) Geographic regulation and cooperative investment in next generation broadband networks

A review of recent literature and practical cases:

This article reviews the theoretical and empirical literature on geographic regulation and co-investments in next generation broadband. Alternative telecom operators have continuously invested in their own infrastructure in recent years. After more than a decade since liberalisation, competitive conditions have substantially changed, especially in urban areas. European regulatory authorities have acknowledged this development by starting regional deregulation. Additionally, different forms of cooperative investments in next generation broadband have appeared on the market. The effects of such schemes on competition, investment and welfare crucially depend on the fine details of implementation. For instance, in the case of joint-ventures, it matters how investment costs are shared and how internal and external access prices are determined. In the case of long-term access agreements, it is essential to consider how access tariffs are structured, whether they can adapt to market developments ex-post and whether contracts are signed before or after the investment takes place. Generally, many of these agreements allow for some extent of risk sharing, offering the possibility to increase investment incentives when firms are not risk neutral. It is suggested that regulators consider introducing regulated co-investment agreements complementing current regulation or in some cases even substituting for it, in addition to considering geographically segmented access prices.

2) Entry and Competition in local Newspaper Retail Markets

When two are enough:

This article estimates sustainable coverage and competitive effects of entry for Swiss newspaper sellers which sell composite goods, including a range of other products such as food and near-food items. It uses the applied entry threshold ratio methodology from Bresnahan and Reiss (1991), which allows estimation even when the range of products under examination is not exactly defined and when price and quantity data are not available. It is found that under monopoly pricing, single firm entry is sustainable in Communes with a market size of over 482 people (leaving 310 Swiss communes without a selling point). With duopoly prices, instead, a first firm would only be able to enter a market with a market size of 921 people (leaving another 263 Communes without coverage). There are therefore tangible benefits from above duopoly prices in monopoly regions. Thus, a clear and quantifiable trade-off between prices in monopoly regions and coverage exists. Moreover, it is found that a second entrant in this market strongly increases competition, while further entry doesn’t have significant additional competitive effects. From a welfare perspective, therefore, it can be stated that “two is enough” to ensure competition in this market. It is shown that this is not the case in some other retail markets, where entry by a third firm may still significantly affect competition. Finally, using these estimation results, it is shown that public policy, which consisted of having the Government controlled Swiss Post enter the newspaper sellers’ retail market, was not optimal as it was focused on urban areas where neither coverage nor competition could be enhanced, while risking competitive distortions. At the same time, it is shown that there are Communes in which such a Government policy may be welfare enhancing.

3) Competition and Market Strategies in the Swiss Fixed Telephony Market

An estimation of Swisscom’s dynamic residual demand curve:

This article develops a market model based on a generalised version of the traditional “dominant firm – competitive fringe” model allowing the incumbent also more competitive conduct than that of a dominant firm. A system of simultaneous equations is developed and direct estimation of the incumbent’s residual demand function is performed by instrumenting the market price with incumbent-specific cost shifting variables as well as other variables. Unlike earlier papers that assess market power in this market, this paper also adjusts the market model to ensure a sufficient level of cointegration and avoid spurious regression results. This necessitates introducing intertemporal effects. While the incumbent’s conduct cannot be directly estimated using this framework, the concrete estimates show that residual demand is inelastic (long run price elasticity of residual demand of -0.12). Such a level of elasticity is, however, only compatible with a profit maximising incumbent in the case of largely competitive conduct (conduct parameter below 0.12 and therefore close to zero). It is therefore found that the Swiss incumbent acted to a great extent competitively in the fixed telephony retail market in the period under review (2004-2012) and that (partial) retail price caps in place can no longer be justified on the basis of a lack of competition.