Competition in Mobile Communications and the Allocation …ec.europa.eu/competition/sectors/telecommunications/archive/... · EU DG Competition Economic Advisory Group Telecommunications

EU DG CompetitionEconomic Advisory Group Telecommunications

Competition in Mobile Communicationsand the Allocation of Scarce Resources:

The Case of UMTS

Jörn Kruse

1 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg

Content

1 Scarce Spectrum and Licensing in Mobile Communic.

2 Scarcity, Spectrum Prices and Efficiency

3 How to Allocate Spectrum

4 License and Spectrum Allocation in GSM and UMTS

5 Competition Intensity in GSM and UMTS



1 Scarce Spectrum and Licensing in Mobile

Communications

License Requirements constitute Entry Barriers and (potential) Inefficiencies

Spectrum is limited -

overall and due to intermodal spectrum allocation

Spectrum Divisibility is limited due to Economies of Scale

Proper intramodal spectrum allocation is the economic rationale for Licensing

Significance of Spectrum Availability


TACAICBAC

AIC1

AIC2

AIC3

TrafficQ1 Q2 Q3 x

TAC1

TAC2

TAC3

BACA

BACA shows Economies of Scale ,AICi : Av. Incremental Cost of Cell Splitting,TACi : Average Costs

2 Scarcity, Spectrum Prices and Efficiency


Factor Substitution (mobile comm production function)

Spectrum vs base station equipment etc. (cell splitting) Spectrum rivalry between different Spectrum Usages (intermodal)

Services and applications (mobile comm, broadcasting, etc.),

different factor substitution in different usages → Efficiency requires Spectrum Prices

(prices according to degree of scarcity)

Intramodal Spectrum Prices


Price

SD3

SD2

SD1

C

SS*

P2A

P3B

0 Q1 Q* QG Spectrum

D

Q4

Intermodal Spectrum Allocation


Spectrum PriceSpectrum Price

E

SDA

T

SDH

D

S

SDJ

U

V

J

R

H

OR0D QH Q* QS QJ

P2

Ps

PJ

P1

B

C

F

SDB

3 How to allocate Spectrum


Objectives

� Efficiency of Mobile MarketsCompetition Intensity vs. Scale Economies

� Transaction Costs, Non-Discrimination, Transparency� Social Objectives

Regional Coverage, Universal Service� Fiscal objectives (???)

Methods

� Criteria/Beauty Contest� Auction

Allocation Methods


Efficiency of

Mobile Markets

Transaction Cost Time

Non-discriminating, Transparent

Social and fiscal objectives

Governments Influence

(from their point of view)

first come first served

-- + -- - -

Lottery -- ++ ++ -- --

Auction ++ + depends

++ ++ --

Discretionary Decisions

-- depends

depends -- depends ++

Beauty Contest/ Criteria Contest

+ depends

-- - depends

depends +

Features of Spectrum Auctions


� Auctions pick the expectedly most-efficient operator,

if willingness to pay = efficiency

(no winners curse / no unrealistic assessments)

� No discrimination (i.e. foreign companies), transparent

� Transaction costs may be low, quick

� Spectrum Fees do not increase consumers� prices,

since / if fees are fixed and sunk

Auction Spectrum Fees (if very high) may endanger firms� Financial Stability

(Auctions in UK and Germany for many European firms)

Auction Methods compared


Low Risk of Collusion

Low Risk of Entry-Block

Endogenous Information

for the Regulator

High Bidder Information

and Low Risk-

Aversion

Suitability for multiple-

object cases with complex cost and/or

demand efficiencies

1 2 3 4 5 6

English Auction (ascending A.)

- - - - 0 + + +

Dutch Auction (descending A.)

+ + + + - - - -

First Price SB (discriminating A.)

+ + + + + - -

Second Price SB (Vickrey A.)

- - + + - - -

Mostly Used: English Auctions + Suitable, Comfortable - Higher Risk of Collusion and Entry Blocking 0 Bidder Info (to prevent Winners Curse) may be questionable after UMTS in UK and Germany

4 License and Spectrum Allocation in GSM and UMTS


90 91 92 93 94 95 96 97 98 99 00 01

Netherlands

Denmark

Germany

United Kingdom

Austria

Sweden

Italy

Hungary

Belgium

Finland

France

Greece

Poland

Portugal

Spain

Switzerland

Ireland

Czech Republic

Iceland

Luxembourg

Norway

90 91 92 93 94 95 96 97 98 99 00 01

1 Betreiber2 Betreiber3 Betreiber4 Betreiber5 und mehr Betreiber

GSM Licensing: Step-by-Step

UMTS Spectrum Allocation in Europe


Country Month Method Number of licences

Spectrum Fees

(Euro per population)

Cost-Index per

population per license

United Kingdom

April 2000

Auction 5 648 32.40

Germany August 2000

Auction 6 endogenous

610 36.60

Italy October 2000

Auction 5 212 10.60

Netherlands July 2000

Auction 5 171 8.55

France February 2001

Beauty contest

2 169 3.38

Austria November 2000

Auction 6 endogenous

103 6.18

Poland December 2000

Beauty contest

3 51 1.51

Belgium March 2001

Auction 3 44 1.32

Portugal December 2000

Beauty contest

4 40 1.59

Switzerland December 2000

Auction 4 19 0.76

Spain March 2000 Beauty contest

4 13 0.53

Norway December 2000

Beauty contest

4 11 0.44

Sweden December 2000

Beauty contest

4 0.0 0.00

Finland March 1999 Beauty contest

4 free -

UMTS Auction Spectrum Fees


� Spectrum Fees via Auctions higher than BC (administratively set) Fees

� Auction Theory Explanations are limited.

Outcomes rather specific for indiv. Country, time etc.

Time of Auction in UK + Germany (Internet + Mobile Hype)

→ Winners Curse (esp. newcomers), shock for the following auctions

� Number of UMTS Licenses mostly higher (+1) than number of GSM incumbents

� UK and Germany "strategic countries" for firms with "European approach�

� Germany: Entry blocking or econ. Reasons, quality / cost AC(15) < AC(10) ?

Newcomers� winners curse, market structure (2-2-2)

5 Competition Intensity in GSM and UMTS


1995 2002 future

Structural Feature/Factor

Assess.

Relevance für high (+)

+ low (-) competition-

Intensity

Assess.

Relevanz für high (+)


Intensity

Assess.

Relevanz für high (+)


Intensity a b c d e f g 1 Number of

Operators small

- relatively

small + medium +

Concentration very high

- high o

2 Entry Barriers high - - high - high o

3 Fixed Costs very high

+ + very high

+ + very high

+ +

4 Sunk Costs very high

o very high

+ very high

+

5 Elasticity of MarketDemand,

Substitution

low - high + very high

+ +

6 Homogeneity und

Transparency

high + + high + + high + +

7 Switching Costs medium o medium - low +

8 Technical and Economic Dynamics

high - medium + low ++

9 Total moderate relatively high

high


UMTS infrastructure sharing

UMTS is late, cost-intensive and success is uncertainfirst years may be crucial

RAN-Sharing (esp. in first years) will reduce costs,increases + enlarges UMTS-development (services)

RAN-Sharing is not a Problem for Competition,even pro-competitive for services markets


Competition Policy or Regulation ?

Mobile Markets have been very successful,* because of low regulation (except licensing),* because they are competitive

Mobile Markets would be harmed by new RegulationCost coverage diff for indiv Tariff-elements (Ramsey)

(1) Mobile Carrier Selection* would be inefficient (alloc, cost)* would dramatically increase regulation

(origination, third-party billing)(2) Mobile Termination

* if there is a problem... : Competition Policy

Comments Welcome


[email protected]

Backup


Abb. AS-6-3: Herfindahl-Index für diverse Länder im Zeitablauf

0

2000

4000

6000

8000

10000

1.Hj. 1994

2.Hj. 1994

1.Hj. 1995

2.Hj. 1995

1.Hj. 1996

2.Hj. 1996

1.Hj. 1997

2.Hj. 1997

1.Hj. 1998

2.Hj. 1998

1.Hj. 1999

2.Hj. 1999

1.Hj. 2000

2.Hj. 2000

1.Hj. 2001

01.09.2001

Schweiz

Österreich

Deutschland

Frankreich

Italien

Niederlande

Spanien

Schweden

Großbritannien

Finland

Fixed Costs and competitive Incentives


Fig. DG4-513: Incentives with high and low fixed and variable costs Low fixed costsFK=1000, VK=90/ME

0

20

40

60

80

100

120

140

160

180

200

220

240

260

280

300

0 10 20 30 40 50 60 70 80 90 100

Quantity

Pric

e

+2000+1000+/-0

-500FK

VK

+4000

+6000

+8000

+10000

+12000

+14000

+16000

High fixed costsFK=9000, VK=10/ME

0

20

40

60

80

100

120

140

160

180

200

220

240

260

280

300

0 10 20 30 40 50 60 70 80 90 100

Quantity

Pric

e

+2000+1000+/-0-500

-2500

-5000

-7500

+4000

+6000

+8000

+10000

+12000

+14000

+16000

VK

FK



Documents

Competition in Mobile Communications and the Allocation …ec.europa.eu/competition/sectors/telecommunications/archive/... · EU DG Competition Economic Advisory Group Telecommunications