November 15, 2000

Concurrentie en regelgeving in de telecommunicatiemarkt

CPB: Regulation useful to stimulate competition in telecommunications markets

Press release
Regulation of retail tariffs is, for the time being, crucial to protect the interests of consumers in the market for fixed telephony. Entry in the market can be stimulated via regulation of the fees paid by operators for "terminating access", i.e. delivering telephony traffic on their networks.

It is, for instance, beneficial for the functioning of the market to base the incumbent's terminating access fees on underlying costs. Conversely, a temporary markup in entrants' terminating access fees may stimulate entry in the market for fixed telephony. During the transition to more effective competition, such a markup is also in the interests of consumers.

These are some of the conclusions drawn by CPB Netherlands Bureau for Economic Policy Analysis in the report 'Competition and Regulation in Telecommunications Markets', published today. Opta, the independent post and telecommunications authority in the Netherlands, has asked CPB to analyse the effects of regulation on entrants and end-users. The background of the study is that in several market segments, e.g. the market for fixed local telephony, the incumbent KPN Telecom is still dominant. Large corporate customers, especially in large cities, are able to use networks built by competitors, but residential consumers often have less or no choice. Therefore, regulation is still necessary. Using applied game theory, the effects of regulatory instruments on strategic interaction between an ex-monopolist and several types of entrants (with and without their own networks to connect end-users) are analysed in the study.

Other conclusions are the following. Generally, regulation can be directed at either services competition or infrastructures competition. An example is regulation of the originating access fee, i.e. the price that Carrier (Pre)Select entrants have to pay to the incumbent to generate traffic on its network. Carrier (Pre)Select means that a consumer makes a call via an entrant, by dialling or presetting a four-digit code. A cost-based originating access fee is beneficial for the cost level of Carrier (Pre)Select operators and hence stimulates services competition. Cost-based fees reduce the risk that entrants are squeezed between the wholesale fees they have to pay to the incumbent and the prices they can charge their customers ("price squeeze"). Conversely, a higher fee increases the cost level of Carrier (Pre)Select entrants and creates stronger incentives to build local networks, for it is then more attractive for entrants to connect end-users themselves. By gradually increasing an initially cost-based fee, it becomes possible to stimulate services competition in the early phase of liberalisation, and make infrastructures competition more attractive for entrants at a later stage. This principle also applies to unbundled access to the local loop (entrants lease the incumbent's copper wires between end-users and local switches). A lower, respectively higher line rental stimulates services, respectively infrastructures competition.

The study demonstrates that in segments where the incumbent is dominant, retail price cap regulation is usually a necessary evil. On the one hand, price caps that are too low, make entry less profitable. On the other hand, price caps that are too high are ineffective: retail prices remain too high and the incumbent has less incentives to increase its efficiency. Therefore, price caps need to be balanced carefully, which is difficult because of the imperfect information about operators' costs. Price caps can be withdrawn if entrants create sufficient downward pressure on retail prices.

Contacts

Dick Morks

Read also the accompanying press release.

The purpose is to increase the knowledge of and insight into the nature of competition and entry in the phase towards mature competition, and the effects of specific regulatory instruments on competition, market structure and consumers’ surplus. The central question is: 

How should one design policy and regulation with the purpose of stimulating competition in markets for fixed voice telephony, while ensuring that consumers benefit from entry, and operators have sufficient incentives to be active on the market?

This question is addressed in a range of different situations, using recent insights from the theory of industrial organization (applied game theory) and computer simulation. The tools of game theory are crucial to understand the incentives of market players who behave strategically, especially in complex market environments such as telecommunications. This is a conceptual study (based on a stylized, but empirically calibrated, description of the market) that does not forecast or describe actual behavior by market players. We are interested in understanding how regulatory instruments can stimulate competition in such a way that consumers benefit from it.

This study examines, within the context of a market dominated by an incumbent operator, three types of entry:

  • facilities-based competition: entry by an operator building its own infrastructure;
  • direct access through “local loop unbundling”: entry by an operator leasing local connections from the incumbent;
  • indirect access through “Carrier Select”: entry by an operator with “originating access” to the incumbent’s customers.

Authors

Paul de Bijl