March 25, 2009

Competition for access; spectrum rights and downstream access in wireless telecommunications

We analyse downstream access and capacity choice in the market for wireless telecommunications, where spectrum rights are owned by vertically integrated duopolists and may be traded.

In the market for wireless telecommunications, radio spectrum is an essential input. Prior to network construction, the incumbents may offer contracts for capacity to an entrant, granting service-based access on the network they will construct. Alternatively, when spectrum trading is allowed, they may sell part of their license, allowing the entrant to build its own network and enter as an infrastructure player.

We find that in this Cournot setting, access is generally provided, as incumbents compete to appropriate the profits of serving a differentiated market through the entrant. Although selling spectrum rights instead of network capacity leads to a loss of economies of scale in infrastructure construction, infrastructure-based entry may dominate as a result of a strategic effect. By delegating capacity choice to the entrant, the access providing incumbent can commit to compete more aggressively, causing its rival incumbent to reduce capacity. A lower aggregate capacity will increase prices and thereby profits.


Michiel Bijlsma
Gijsbert Zwart