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.
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