Service-based vs. facility-based competition in local access networks

Service-based vs. facility-based competition in local access networks

Telecommunications Service and Policy

2008/12/3Moise & DongUk

ProblemSetting

SolutionApproachIntroduction

ContentsContents

§ Introduction

§ Problem Setting

§ Solution Approach

§ Result

ResultProblemSetting

SolutionApproachIntroduction

Telecommunications Service and Policy 2

§ Introduction

§ Problem Setting

§ Solution Approach

§ Result

ResultProblemSetting

SolutionApproachIntroductionIntroductionIntroduction

§ Number of Internet Users have increased rapidly

Telecommunications Service and Policy 3

§ Also, Number of ISP have increased.

§ These things cause Service-based and facility based

competition in local access networks

ResultProblemSetting

SolutionApproachIntroductionIntroductionIntroduction

ServiceService--based competitionbased competition

§ When the entrant uses the facilities of the incumbent,

competition is called service-based

Telecommunications Service and Policy 4

[ Service-based competition in Europe (shares of DSL market) ]

• Resale

• Unbundled access to the local loop

Entrant buy the service Replace its brand name

ResultProblemSetting

SolutionApproachIntroductionIntroductionIntroduction

Telecommunications Service and Policy 5

• Unbundled access to the local loop

Entrant co-locates in the

incumbent’s facilities and

installs its own equipment

ResultProblemSetting

SolutionApproachIntroductionIntroductionIntroduction

FacilityFacility--based competitionbased competition

§ Facility-based competition takes place when the entrant

builds its own facility

• Cable networks

• 3G mobile networks

• Satellite networks

• Broadband wireless local loop

• Fibre-optic networks

Telecommunications Service and Policy 6

• Cable networks

• 3G mobile networks

• Satellite networks

• Broadband wireless local loop

• Fibre-optic networks

ResultProblemSetting

SolutionApproachIntroduction ProblemProblem

SettingSetting

Assumption in problemAssumption in problem

§ Consumers want to maximize their utility

Telecommunications Service and Policy 7

• v is the fixed utility from high-bandwidth services

• and x represent consumer’s taste for quality and variety

• and represent the horizontal location and price of firm i

ResultProblemSetting

SolutionApproachIntroduction ProblemProblem

SettingSetting

• When firms compete on the basis of services, they provide the same

quality of service.

• New technology brings a superior quality of service compared to the

copper local loop.

Telecommunications Service and Policy 8

• Cost of adopting the new technology is declining over time.

( is the discount factor, a is a positive constant)

• The incumbent cannot by-pass its own infrastructure with the new

technology

Entrants ProblemEntrants Problem

ResultProblemSetting

SolutionApproachIntroduction ProblemProblem

SettingSetting

§ Issue : When do entrants build their own facilities?

• As the cost of adopting the new technology decreases over time and

converges to zero, entrant builds its own facility.

• The entrant waits to builds its own facility until the time that it is

optimal to adopt the new technology.

• Optimal date

Case 1 : No unbundling of local loop

Case 2 : Unbundling of local loop

Telecommunications Service and Policy 9

• As the cost of adopting the new technology decreases over time and

converges to zero, entrant builds its own facility.

• The entrant waits to builds its own facility until the time that it is

optimal to adopt the new technology.

• Optimal date

Case 1 : No unbundling of local loop

Case 2 : Unbundling of local loop

• Case 1 : No unbundling of local loop

There is no service-based competition prior to technology adoption.

The entrant maximizes its discounted profits net of the adoption cost

The optimal date of adoption is

• Case 1 : No unbundling of local loop

There is no service-based competition prior to technology adoption.

The entrant maximizes its discounted profits net of the adoption cost

The optimal date of adoption is

ResultProblemSetting

SolutionApproachIntroduction ProblemProblem

SettingSetting

Telecommunications Service and Policy 10

• Case 1 : No unbundling of local loop

There is no service-based competition prior to technology adoption.

The entrant maximizes its discounted profits net of the adoption cost

The optimal date of adoption is

• Case 1 : No unbundling of local loop

There is no service-based competition prior to technology adoption.

The entrant maximizes its discounted profits net of the adoption cost

The optimal date of adoption is

• Case 2 : Unbundling of local loop

There is service-based competition prior to technology adoption.

The optimal date of adoption is

• Case 2 : Unbundling of local loop

There is service-based competition prior to technology adoption.

The optimal date of adoption is

ResultProblemSetting

SolutionApproachIntroduction ProblemProblem

SettingSetting

Incumbent ProblemIncumbent Problem

§ Issue : How obtain the highest profit flows when it

operates as a monopolist?

• Incumbent obtain the highest profit flows when it operates

as a monopolist.

• So, incumbent leads entrant to decide service-based entry.

• As a consequence, the incumbent has strong incentives to determine

attractive terms of lease for its loops.

Telecommunications Service and Policy 11

• Incumbent obtain the highest profit flows when it operates

as a monopolist.

• So, incumbent leads entrant to decide service-based entry.

• As a consequence, the incumbent has strong incentives to determine

attractive terms of lease for its loops.

ResultProblemSetting

SolutionApproachIntroduction ProblemProblem

SettingSetting

• Case 1 : Fixed rental price

Setting very high-rental price protects its monopoly profits in the short

run, but triggers facility-based entry.

Therefore, incumbent sets a relatively low rental price in particular

when adoption cost for the new technology is sufficiently low.

• Case 1 : Fixed rental price

Setting very high-rental price protects its monopoly profits in the short

run, but triggers facility-based entry.

Therefore, incumbent sets a relatively low rental price in particular

when adoption cost for the new technology is sufficiently low.

Telecommunications Service and Policy 12

• Case 1 : Fixed rental price

Setting very high-rental price protects its monopoly profits in the short

run, but triggers facility-based entry.

Therefore, incumbent sets a relatively low rental price in particular

when adoption cost for the new technology is sufficiently low.

• Case 1 : Fixed rental price

Setting very high-rental price protects its monopoly profits in the short

run, but triggers facility-based entry.

Therefore, incumbent sets a relatively low rental price in particular

when adoption cost for the new technology is sufficiently low.

• Case 2 : Time-dependent rental path

When the incumbent determines a time-dependent rental path, r( ),

there is no longer a trade-off regarding the pricing of the loops.

Proper rental path may sub-optimally delay technology adoption

• Case 2 : Time-dependent rental path

When the incumbent determines a time-dependent rental path, r( ),

there is no longer a trade-off regarding the pricing of the loops.

Proper rental path may sub-optimally delay technology adoption

ResultProblemSetting

SolutionApproachIntroduction SolutionSolutionApproachApproach

Regulating rental priceRegulating rental price

§ Because situation between incumbent & entrant is different,

optimal rental price is not necessarily the same for all region.

• The costs of the loops may vary in different geographies.

• The cost of facility-based entry may also depend on geographical

settings.

• Therefore, the rental price of the loops may de-averaged.

Telecommunications Service and Policy 13

• The costs of the loops may vary in different geographies.

• The cost of facility-based entry may also depend on geographical

settings.

• Therefore, the rental price of the loops may de-averaged.

ResultProblemSetting

SolutionApproachIntroduction SolutionSolutionApproachApproach

§ According to develop technology

RentalPrice

• New Technology is much

profitable, Rental price is low.

• New Technology is not

profitable, Rental price is high.

Telecommunications Service and Policy 14

Technology

But, if Rental price is vary high, entrants give up service-based

competition. They decide entry to facility-based competition.

• New Technology is not

profitable, Rental price is high.

Regulating quality of accessRegulating quality of access

ResultProblemSetting

SolutionApproachIntroduction SolutionSolutionApproachApproach

• Incumbent operators can delay full unbundling-based entry.

• Incumbent operators can also favor their DSL subsidiary by

delaying the provision of unbundling lines to new entrants.

• The quality of service provided by the incumbent to new entrants

may be lower than that provided to its own subsidiary.

• New entrants also complain about the absence or the scarcity

of information.

Telecommunications Service and Policy 15

• Incumbent operators can delay full unbundling-based entry.

• Incumbent operators can also favor their DSL subsidiary by

delaying the provision of unbundling lines to new entrants.

• The quality of service provided by the incumbent to new entrants

may be lower than that provided to its own subsidiary.

• New entrants also complain about the absence or the scarcity

of information.

§ Incumbent can control quality of access their facility.

§ So, they want to maintain their monopoly.

§ Quality degradation strategies are often cited an alternative

to preemptive pricing strategies.

§ Incumbent can control quality of access their facility.

§ So, they want to maintain their monopoly.

§ Quality degradation strategies are often cited an alternative

to preemptive pricing strategies.

ResultProblemSetting

SolutionApproachIntroduction SolutionSolutionApproachApproach

Telecommunications Service and Policy 16

§ Incumbent can control quality of access their facility.

§ So, they want to maintain their monopoly.

§ Quality degradation strategies are often cited an alternative

to preemptive pricing strategies.

§ Incumbent can control quality of access their facility.

§ So, they want to maintain their monopoly.

§ Quality degradation strategies are often cited an alternative

to preemptive pricing strategies.

§ Therefore, Adjustment organization is needed.§ Therefore, Adjustment organization is needed.

ResultProblemSetting

SolutionApproachIntroduction SolutionSolutionApproachApproach

Other FactorsOther Factors

§ Profits from service-based competition constitute

an entrant to build its own facilities.

§ Regulating the terms of access to the ILEC’s local access

network plays an essential role in determining the shape

of the competition in the telecommunications industry.

Telecommunications Service and Policy 17

§ Profits from service-based competition constitute

an entrant to build its own facilities.

§ Regulating the terms of access to the ILEC’s local access

network plays an essential role in determining the shape

of the competition in the telecommunications industry.

• Switching costs

• Learning effects

• Switching costs

• Learning effects

• Upgrade investments

• Number of potential entrants

• Upgrade investments

• Number of potential entrants

ResultProblemSetting

SolutionApproachIntroduction ResultResult

§ Issue1 : When do entrants build their own facilities?

• First, Entrant entry service-based competition.

• Thereafter, Entrant waits to builds its own facility until the time

that it is optimal to adopt the new technology.

• Optimal date is that maximize discounted profits.

• First, Entrant entry service-based competition.

• Thereafter, Entrant waits to builds its own facility until the time

that it is optimal to adopt the new technology.

• Optimal date is that maximize discounted profits.

§ Issue2 : How obtain the highest profit flows when it

operates as a monopolist?

Telecommunications Service and Policy 18

§ Issue2 : How obtain the highest profit flows when it

operates as a monopolist?

• The incumbent has strong incentives to determine attractive terms of

lease for its loops.

• The Incumbent decide optimal rental price and permit high quality

of access

• The incumbent has strong incentives to determine attractive terms of

lease for its loops.

• The Incumbent decide optimal rental price and permit high quality

of access

ResultProblemSetting

SolutionApproachIntroduction ResultResult

NOT

Rental Price

TechnologyPrice,Level

Discounted profit is maximize,

Entrant entry facility-based competition

Discounted profit is maximize,

Entrant entry facility-based competition

Telecommunications Service and Policy 19

Rental Price

Time

First, Incumbent decide proper rental price and leads entrant to entry

service-based competition.

Second, Incumbent keep developing new technology to maintain their

market.

Thank You!!Thank You!!Q / AQ / A

Thank You!!Thank You!!Q / AQ / A