Incumbent Network Research Articles

Incentives to Invest and to Give Access to Non-Regulated Next Generation Networks

We analyze the incentives of a telecommunications incumbent to invest and give access to a downstream entrant to a next generation network. We model the industry as a duopoly, where a vertically integrated incumbent and a downstream entrant, that requires access to the incumbent's network, compete on Hotelling's line. The incumbent can invest in the deployment of a NGN that improves the quality of the retail services. Access to the old network is regulated, but access to the new network is not. If the innovation is drastic, the incumbent always invests in the NGN, but does not give access to the entrant. If the innovation is non-drastic and if the access price to the old network is low, the incumbent voluntarily gives access to the NGN. If the innovation is non-drastic, there is no monotonic relation between the access price to the old network and the incumbent's incentives to invest. A regulatory moratorium emerges as socially optimal, if the innovation is large but non-drastic. We also analyze the case where both firms can invest in the deployment of a NGN.

Broadband Policy: Does the U.S. Have it Right after All?

In this paper, I compare U.S. and (briefly) Canadian broadband policies and outcomes with the policies and outcomes in other advanced nations. The results show that the relatively deregulatory American approach to broadband policy has produced highly desirable results, including high levels of investment and innovation, nearly ubiquitous broadband availability, high and increasing levels of penetration, falling prices, and high levels of consumer satisfaction. Indeed, the U.S. model is producing better overall results than in countries which continue to pursue mandatory unbundling and other highly regulatory approaches. Moreover, the advantages of the American model are likely to grow more pronounced over time. To avoid being left behind, other nations should abandon policies based on mandatory resale of incumbent networks and adopt the American approach.

Do UNE Rates Reflect Underlying Costs?

The regulatory regime under which incumbent telephone companies are required to offer portions of their networks to competitors is a joint product of Federal and state authorities. While the regime is extremely complex, it can broadly be described as having two main substantive components: 1) Regulations setting out which elements of the incumbents' networks must be offered (or unbundled); and 2) Regulations that set the prices that must be charged for those elements. Under the Telecommunications Act (the Act), as implemented, authority for both components of the regulatory regime is shared between the Federal Communications Commission (FCC) and the states, generally acting through state Public Utility Commissions (PUCs).While the precise division of authority between the FCC and the PUCs is a source of substantial controversy and ongoing litigation, there is general agreement that the policy of mandated access to incumbent networks should be implemented on a nationally consistent basis--i.e., that, regardless of the level at which decisions are made, they should be made on the basis of, and comport with, a single analytical framework. Broadly speaking, it is the FCC's responsibility to establish the framework, and the PUCs' responsibility to implement it.In this study, we examine state PUCs' implementation of the FCC's rules regarding the pricing of Unbundled Network Elements (UNEs), i.e., the portions of the network which the FCC requires be made available to competitors. We find that variations in costs among the states explain only about half of the variation in the rates set by state PUCs. Furthermore, the typical deviation of state-set rates from costs is at least 15% from the levels that would be implied by a systematic approach. These results suggest that the current regime has not resulted in consistent application of the FCC's regulatory framework.

The impact of regulation on the retail prices in fixed-line telephony across the European Union

This paper estimates reduced-form models for incumbent prices in the fixed telecommunications industry using data for European Union (EU) countries from 1998 to 2002. The regulation of fixed-line telephony has a significant impact on prices for residential consumers. Liberalization of the telecommunications industry decreased retail prices by about 8.2%. The introduction of carrier pre-selection and number portability had a negative impact on price levels. The estimation results also suggest that a 1% decrease in termination charges on the incumbent network led on average to a 0.17% decrease in the cost of usage basket for residential consumers. Furthermore, in the pricing regressions for incumbent local and national calls at peak and off-peak times interconnection charges are significant only in the estimation of national peak prices. A 1% decrease in single transit interconnection charges on the incumbent network led to a 0.31% decrease in incumbent national prices at peak times, as calculated for the average prices in the EU in 2002.

Another instance where privatization trumped liberalization: The politics of telecommunications reform in South Africa—A ten-year retrospective

Soon after the first democratic election in 1994, South Africa passed legislation to revamp the telecommunications sector—to roll out telephone service to the previously disadvantaged and establish an independent regulator to oversee the reform. The Government sold a 30 percent stake in the state-owned incumbent network operator, Telkom, to expand telephone service to under-serviced areas and populations. Ten years on, the reform has largely failed. Telkom, granted a 5-year period of exclusivity to expand the network, has used its monopoly power to thwart competition. It has raised prices so high as to be damaging to the economy. The Regulator has been largely sabotaged by the Government, in part due to the consequences of the haste to privatize, in part because the ANC leadership has been loath to trust democratic structures outside of its immediate control. The situation has opened up opportunities for rent-seeking under the ideological aegis of Black Economic Empowerment. The paper examines the relative failure of reform in South Africa in the context of internal South African politics and against a backdrop of sectoral reform in similarly situated countries.

Is Mandatory Unbundling the Key to Increasing Broadband Penetration in Mexico? A Survey of International Evidence

We examine empirically the proposition that mandatory unbundling is the key to increasing broadband penetration in Mexico. We begin by reviewing the empirical economic literature on the relationship between mandatory unbundling and two measures of economic performance: (1) broadband penetration and (2) investment by entrants and incumbent network owners. We explain why a policy that aims to maximize broadband penetration might be inconsistent with maximizing static and dynamic efficiency. Next, we present new empirical results on the effect of mandatory unbundling on investment by entrants and incumbents. We find that, despite the best efforts of the regulators, no EU country has experienced the promised transition from resale to bitstream to local loop unbundling (LLU). Countries with strong unbundling policies, such as those in the EU, have much lower incumbent network investment than countries that have much less aggressive wholesale unbundling policies, such as Canada and the United States. We conclude with alternative policy recommendations for stimulating broadband penetration in Mexico. Because access to computers is the binding constraint on broadband penetration - only 20 percent of homes own a computer - we propose that Mexico subsidize the price of computers to stimulate broadband adoption.

CEO Network and CEO Turnover

This paper analyzes the aggregate properties of the network formed by chief executive officers (CEOs), measures individual position on this network, and explores its relation to CEO turnover and new CEO selection. I find that individual connectedness matters, more so in the choice of a new CEO, but also in whether a CEO departs from a current job. Connnectedness makes CEOs more likely to depart from their current positions. Outside CEO hires are likely to be well connected. New CEOs with central network positions receive significantly higher levels of compensation. Firms that hire well-connected new CEOs tend to be bigger, have more board members and higher proportion of outside directors. The results show no evidence that there are relations between the firm performance change surrounding turnover incidences and the incumbent or successor CEO's network position.

Bundling and Collusion in Communications Markets

This paper deals with competition in communications markets between an incumbent and an entrant. We analyze the effect of bundling strategy by a firm who enters an incumbent market. This market dimension has profound implications on the sustainability of collusion in an infinitely repeated game framework. We show that the bundling strategy of the entrant might hinder collusion. Futhermore, we consider a setting in which the entrant uses a one-way access that the incumbent possesses. In such situation, we show that when the entrant bundles its products, a low access charge for call termination on the incumbent network might increase the feasibility of collusion. This result has an important policy implication.

Access pricing and investment with stochastically growing demand

This paper examines the effect of access charges on firms' incentives to invest in a network facility with a stochastically growing demand. An access-to-bypass equilibrium is characterized in terms of an access charge and a level of network investment cost. In the equilibrium, a leader first enters a market by building a new network. Then a follower makes a sequential investment for the construction of an additional network after accessing the incumbent's network. In an open access environment, we confirm that the incentive for preemption can be enhanced by an increase in the access charge.

Competition in Local Telecommunications

The Telecommunications Act of 1996 created a framework for competition in local telecommunications. Under its rules and under the jurisdiction of state regulatory authorities, competitive local telephone companies were to gain access to some or all parts of the incumbent's network through known wholesale tariffs and offer retail local telephone service. As customers adopt other technologies for communications–mobile wireless service, broadband for email, messaging, and information retrieval–additional competitive pressures are put on the core voice telephone market. The substitution of usage and access from local telephony to other modes of communication is regarded as intermodal competition and is the subject of this paper. This study concerns local telecommunications competition between incumbent and competitive service providers in the United States. In addition to measuring competition from within the wireline market, we find significant intermodal competitive impacts resulting from wireless and high-speed development. We report empirical results from an econometric model that measures line loss impacts between carriers and the effects of wireless and high-speed services on the wireline market. The paper offers interpretation of the strategic and policy implications of these results.

COMPETITION, REGULATION AND WELFARE IN THE PRESENCE OF NETWORK EXTERNALITIES

In this paper we consider a simple model of an industry with network externalities, where a benefit to each consumer from network services depends on the size of the network. We first consider a single network and cover the cases with and without fixed cost of entry. We then turn to the two-network industry, where the incumbent network and a new entrant network compete for the market and may differ both in their marginal costs and demand structures. In addition, we identify several situations where public policy may play a crucial role in sustaining socially advantageous network service provision.

Special Issue Papers: Revenue management performance in a low-fare airline environment: Insights from the Passenger Origin—Destination Simulator

The growth of low-fare airlines has led researchers and network airlines alike to question the validity of existing pricing and revenue management strategies in the changing competitive environment. Given the less restricted fare structures offered by low-fare new entrant carriers, the revenue benefits of existing revenue management systems are likely to be affected. The Passenger Origin—Destination Simulator (PODS) is used to evaluate the changes in airline revenue management system performance in a hypothetical network served by incumbent network carriers and a low-fare new entrant airline. Simulation results show that, while incumbent network carrier revenues are indisputably reduced by low-fare entry, the incumbents and low-fare new entrant alike realise substantial benefit from the use of revenue management. Furthermore, the incremental revenue gains from the use of network revenue management (relative to leg-based revenue management) are very robust to changes in the competitive environment.

Dynamic regulation and entry in telecommunications markets: a policy framework

We analyze a repeated setting of an asymmetric, differentiated telecommunications market with an incumbent and an entrant. The entrant may roll out its own network or use parts of the incumbent's network. The incumbent is established in the market, while the entrant gradually builds up a track record for quality. We investigate different entry strategies and regulatory policies and discuss entrants' incentives to invest in network depending on regulatory choices.

Strategic Change in UK Telecommunications:: Empirical Evidence

The global telecommunications marketplace has witnessed considerable and unprecedented changes in the past 25 years culminating in the transformation of industry structures, market-specific structures and the internal structures of incumbent telecommunications operators. Against this backdrop, this paper reports empirically on the evolving behavioural nature of the incumbent UK telecommunications operator (BT) 1 1 Disclaimer: It is not the intention of this study to criticise managerial behaviour or managerial decisions of BT and therefore the study should be viewed from the perspective of assisting in furthering understanding of the impact of UK telecommunications privatisation on the evolving nature of change at the former UK incumbent network operator. since privatisation in 1984 through the implementation of a number of key change initiatives. A case study approach was adopted, with face-to-face interviews being carried out with senior executives, using semi-structured questionnaire checklists. Content analysis was subsequently applied to collected data and results allude to the impact of corporate level strategic decision-making in terms of identifying evolving behavioural characteristics of cultural and structural changes at the firm.

Dynamic Regulation and Entry in Telecommunications Markets: A Policy Framework

We analyze a repeated setting of an asymmetric, differentiated telecommunications market with an incumbent and an entrant. The entrant may roll out its own network or use parts of the incumbent's network. The incumbent is established in the market, while the entrant gradually builds up a track record for quality. We investigate different entry strategies and regulatory policies and discuss entrants' incentives to invest in network depending on regulatory choices.

Privatizing Monopolies in Developing Countries: The Real Effects of Exclusivity Periods in Telecommunications

Many developing countries have given newly privatized incumbent network utilities, especially telecommunications, exclusive rights to serve particular markets. Research to date has explored privatization, competition, and to a lesser extent, regulation. We know little, however, about the effects of the privatization transactions themselves and, in particular, how these ‘‘exclusivity periods’’ matter. I use original data to investigate this approach to privatization. I find that exclusivity periods are associated with significant increases in the firm’s sale price. Exclusivity periods are also, however, correlated with a significant decrease in the incumbent’s investment in the telecommunications network, payphones, mobile telephone penetration, and international calling.

Price Regulation of Access to Telecommunications Networks

Abstract Without access of networks to each other, competition in the telecommunications sector would hardly have spread so quickly. Such mutual access is necessary for carriers to provide ubiquitous service and enable endusers to call and be called by anybody without subscribing to a system-wide monopolist. One-way access concerns bottleneck inputs provided by an incumbent network to entrants, while two-way access concerns the interconnection between networks. Whereas one-way access regulation is exclusively driven by containment of market power, two-way access is additionally affected by collusion possibilities. Among the numerous pricing rules discussed, none clearly dominates. This article provides a roadmap vis-a-vis the competing policy objectives for access price regulation.

The Arbitrage Mirage: Regulated Access Prices with Free Entry in Local Telecommunications Markets

Incumbent telecommunications carriers have been mandated to share their networks with new retail service providers at regulated wholesale rates. This regulatory structure creates options which incumbent systems must write and which all potential entrants are awarded at a price of zero. Intense debate revolves around the effect of the policy in promoting investment in network infrastructure or retarding it. Rival viewpoints in the policy discussion, however, appear to share the fundamental position that the options issued entrants by incumbent network owners are a transfer of wealth. This paper notes that, to the extent that the regulations actually achieve their purpose in eliminating entry barriers, the assumption is incorrect. Eliminating the sunk costs associated with providing network services can result in regulatory arbitrage that reduces the value of the option to enter to zero. The U.S. market for local telecommunications has witnessed characteristic elements of this rent seeking competition, and financial markets suggest that investors have begun to incorporate the view that the regulated wholesale access regime results in zero long-term profits for entrants.

Local loop unbundling in the Italian network

Unbundling consists of the possibility for a new operator to have special access to an incumbent's network infrastructure in order to provide value-added services without the necessity to duplicate the infrastructure itself. Local loop unbundling has received the most attention in Europe and in Italy. Most Italian operators are interested mainly in physical access to copper loop, which gives the opportunity to offer broadband services pervasively by exploiting the capabilities of xDSL technology. Technical issues to be faced in offering these services are severe and include loop qualification, interference evaluation, and shortage of available loops. Nonetheless, the Italian case, where more than 20 incoming operators are planning to deploy services on unbundled local loops, demonstrates that this opportunity can be a major driver for the development of the broadband services market.

The Political Economy of Access Pricing Problem

This paper extends a basic 'common agency' model of policy determination to a case of a policy vector where lobbies have oppposed interests in one of the instruments. Liberalisation takes the form of an entrant that has to access the incumbent's network, while the incumbent remains vertically integrated. In a political equilibrium the access charge for the use of the network tends to be below the optimal access charge, for a fixed level of final prices. Conditions are shown under which the gains from trade in the relationship between lobbies and parties are captured by the politicians and the choice of instruments is biased towards inefficient ones. Moreover, efficient investment levels are no longer sustainable throught capture.