paul j.j. welfens · to high sunk costshigh sunk costs (r&d and marketing expenditures are(r&d and...

Paul J.J. WelfensEuropean Institute for International Economic Relations (EIIW);

University of Wuppertal (www.euroeiiw.de)Macroeconomics/ Jean Monnet Chair for European Integration/ p g

Rational Regulatory Policy for the Digital Economy: Theory and EU Policy Options

Paper prepared for a seminar at the FCC, Washington DC, January 24, 2006; also presented at ITS Meeting, University of Amsterdam, 8/23/06, revised

2008 and 2011

ContentsContents

d i1. Introduction2. Theoretical Analysis of Telecommunications

Markets and RegulationMarkets and Regulation2.1 Background2.2 Theoretical Starting Points2.3 Efficiency in Oligopolistic Markets2.4 Achieving an Optimum through Differentiated Two-part Tariffs

3 Regulatory Developments3. Regulatory Developments3.1 Regulatory Developments in the US3.2 Regulatory Developments in Europeg y p p

4. Conclusions Emphasis on asymmetric fixed line competition: 1 big firm, several others.Role of differentiated two-part tariffs (welfare!) – incl wholesale market!

Prof. Dr. P.J.J. Welfens, www.eiiw.eu 2

Role of differentiated two-part tariffs (welfare!) – incl. wholesale market!Why rather limited regulations can make sense under certain conditions...

Specifics of pTelecommunications Markets

i f l / i f d i Economies of scale/economies of density (natural monopoly problem; cost structure: ( p y p ;marginal costs and average costs falling with q)

Network effects (endogenous increase of Network effects (endogenous increase of demand as more users get switched on to the

t k)network) Universal service: Everybody should have Universal service: Everybody should have

access to Telecom services at affordable prices;subsidy problemsubsidy problem


Telecommunications Markets Opening up for competition in the EU in 1998/

EU Commission pushed for this (free marketEU Commission pushed for this (free market access; no longer state-owned monopoly – in UK duopoly since 1984 later full opening up)UK duopoly since 1984, later full opening up) Network operation Competition in services: voice telephony and

other (digital) services; voice, video, data = all the same in a digital world = convergence of markets = more competition in bigger markets


1. Introduction1. Introduction

Digital Services have expanded for mainlyDigital Services have expanded for mainly three reasons in the late 1990s:

Digitization has blurred traditional market Digitization has blurred traditional market demarcations

Expansion of broadband networks has Expansion of broadband networks has created huge new markets for digital communicationcommunication

Governments in Europe – and partly in Asia – have opened up markets forhave opened up markets for competition, thus following the move of the US and the UK in 1984.


High Progress Rate & StrongHigh Progress Rate & Strong Competition: Fall of Relative Price

ICT Dynamics

• ICT producing sector with high rate of technological progress• ICT is an enabling technology used in all sectors

Dynamics

• High progress rate = fall of relative pricell f l i i i li h l h f (i l

Price Dynamics

• Fall of relative ICT price implies that real share of ICT (in total GDP) is rising over time more than nominal share suggests

• Opening up fixed line telecommunmication = morecompetition in digital services = falling services prices

Competition• Digitization = more competition as market demarcations

fall (e.g. cable TV; fixed line telecommunications etc.; TRIPLE PLAY PRODUCTS)


1. Introduction1. Introduction The traditional approach to consider telecommunications asThe traditional approach to consider telecommunications as

a natural monopoly has been given up in both the US and Europe; but cost characteristics matter (sunk costs + economies of scale; in telco markets ALSO network effects)economies of scale; in telco markets ALSO network effects).

Regulation with a focus on competition can put focus alternativelyalternatively on the services markets; this focus typically is chosen when

infrastructure competition seems to difficult to achieve, that is if there are hardly any domestic or foreign newcomers to be expectedthere are hardly any domestic or foreign newcomers to be expected and if the uncumbent enjoys a very strong dominance;

infrastructure competition; emphasizing infrastructure-based competition puts the focus on incentives for adequate investment ofcompetition puts the focus on incentives for adequate investment of competiting network operators and for incentives for resale of capacities; essential facilities doctrine (essential facility = bottleneck resource which is crucial for market entry!)


bottleneck resource which is crucial for market entry!)

Internet, Telecommunicationsh d l b l d l Internet has created new global digital

markets; internet providers which need access ; pto customers

Internet has network effects Internet has network effects Internet and mobile telecommunications very

innovative sectors Voice over IP is the new network architecture Voice over IP is the new network architecture

of telecommunications Combined services; broadband =faster service


Demand Dynamics and Supply y pp yDynamics

• Demand is increasingN t k

g(upward rotation) over time as subscriber basis grows

• International network effects

Network Effects • International network effectsEffects

• Static economies of scale(equipment)D i l i

Economies• Dynamic scale economies

(learning by doing)of Scale


Internet Dynamics Network operation: Telecoms fixed networks

and mobile telecoms networkand mobile telecoms network Liberalization of fixed network operation in the EU

in 1998in 1998 Liberalization of voice telephony in 1998

Dynamics Stimulated by network effectsS u a d by o s Economies of scale

Product innovations Product innovationsProf. Dr. P.J.J. Welfens, www.eiiw.eu 10

1. IntroductionTraditionally, there have been three arguments for

government to intervene in telecommunications markets: Natural monopoly – which no longer is an argument in

general, however, technological arguments still play a particular roleparticular role

Need for interconnection rules which reflects a kind of externality of network operation on the side of each network operator; this is partly related to the topic ofnetwork operator; this is partly related to the topic of network effects which stand for endogenous growth and mainly are linked to certain services (not

t k h)networks as such) Universal services which reflect the desire of society/the

political system that all citizens should have access topolitical system that all citizens should have access to important services at affordable costs; a new concept of (Internet-based) universal services is needed?!


1. Introduction1. Introduction

The main aim of regulation is static and dynamic efficiency inThe main aim of regulation is static and dynamic efficiency in telecommunications, in particular in digital services. From a pro-competition policy perspective it is necessary to achieve

sustained competition in telecommunications technological neutrality & intensive innovation; not to

impose a technological bias or distort the innovation processimpose a technological bias or distort the innovation process to particularly maintain an open and competitive access

as the access market is a kind of intermediate inputas the access market is a kind of intermediate inputfor all digital services

effective international policy cooperation in order to make sure the competition in international telephony is holding; there has been broad success in bringing down international telephony prices after 1998


down international telephony prices after 1998

1. Introduction1. IntroductionAs regards effective competition there are four potentialAs regards effective competition there are four potential

impediments traditional market barriers to entry which typically are related

to high sunk costs (R&D and marketing expenditures areto high sunk costs (R&D and marketing expenditures are the main aspects here)

bundling strategies of the incumbent operator which g g ptypically tries to shift market power from market i to market j (normal bundling is ok; can we distinguish from unnormal b.?)

barriers for foreign investors which could serve as a barriers for foreign investors which could serve as a powerful element in potential competition – in EU after a first wave of cross border retreat of many incumbent FDI projectsimpediments for resale which should play a certain role as impediments for resale which should play a certain role as long as there not really at least two full competing networks.


1. Introduction; ECTA Scores are positively correlated with I/Y in telpositively correlated with I/Y in tel.

Fig. 1: Regulatory Scorecard

Scorecard 2005

430386

500Study might have a bias/OFCOM sponsored386

337 334 313 302 299 297 289 276 274 271234 225 213 213

300

400y g / p

234 225 213 213

100

200

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100

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nmark

Franc

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Irelan

dSw

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Hung

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Belgi

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Prof. Dr. P.J.J. Welfens, www.eiiw.eu 14ECTA, Regulatory Scoreboard, Jan. 2006

2.1. Background: Capital Market Contributing to Efficiency Partly (EU)Contributing to Efficiency Partly (EU)

Barriers for international mergers and acquisitions in the fi d li t l i ti t b t d tfixed-line telecommunications sector can be expected to fall in the long run, namely for two reasons:

As newcomers gradually gain market shares in many EU As newcomers gradually gain market shares in many EU countries the effective restrictions on international mergers in Europe will decline in the future;

The growing market share of mobile telecommunications in the overall telecommunications sector and tendencies for mobile phone services to substitute forand tendencies for mobile phone services to substitute for fixed line telecommunications; falling effective market share of incumbents in EU. This holds because market shares in mobile telephony typically are more equally

distributed than in fixed line telephony. Fixed/mobile substitution plays considerable role among young


/ p y g y gage groups so that over time mobile/fixed subst. ++

2.1. Background2.1. BackgroundInternet business there are 3 pillars of revenue for the service provider:Internet business there are 3 pillars of revenue for the service provider: access to the internet; this market clearly is interwoven with the

telecommunications and cable TV market – regulatory policies matter (e.g. role of bitstream access which is different across EU countries due

d ff l l l d d ff f hto different national regulatory policies and different structures of the communications network – see e.g. the strong competitive role of cable TV in the Netherlands and the UK vs. the weak role of cable TV in Germany and Italy)Germany and Italy)

paid services; the market for paid services is almost global, however, there are language barriers and sometimes technical access barriersthere are language barriers and sometimes technical access barriers which prevent full internationalization. Internet providers in principle can provide TV services. Paid Services most attractive for Telcos whose revenues in traditional telephone services are declining.

portal revenues generated through advertising. EU firms and US firms in the advertising business – originally coming from the print and TV

di d i t th l b l d ti i k t


media - dominate the global advertising markets.

Internet Services Grow

Paid Services/Portals; INTERNET beats Mobile Services

Internet Adver-tising (high growth)

Access is basicbusiness with tising (high growth)limited dynamics

Telcos want triple play: network operation, voice &video/advanced digital


2.1. Background2.1. Background

Fig 2: Regulation of

EU Regulatory Framework

WTO ITU

(including WSIS)

Fig. 2: Regulation of Telecommunications and Digital Services

National Regulatory Authority Country I

Trade in

Digital Products

Digital Services

National Regulatory Authority Country II

Products Services

Universal Services

Voice Telephony and Value

Added Services

Voice Telephony and Value

Added Services

Universal Services

Fixed-line, wireless, cable TV overlappingFixed line netw. partly competitive EU/US

Domestic Market

Domestic Market

Inter-natio-

nal Calls

Fixed Line

Cable TV

Mobile

Fixed Line

Cable TV

Mobile

US cable TV network >> than in EU;

EU mobile density ahead of EU, butC s MobileMobile

Access

Local Calls

Long Distance

Calls

Access Local Calls

Long Distance

Calls

Host Host

Average Rate Per User in US>EU (05);US broadband unregulated since 2005,EU countries shaped by strong reg.

Internet Internet Host DensityHost

Density

Global Services Market

Unsolved Issue in EU and US: Secon-dary Market for Mobile LicencesRULES f th I t t/WSIS


ICANN/ ITU

RULES for the Internet/WSIS...

2.1. Background2.1. BackgroundICT Information markets imperfect (disregardingICT Information markets imperfect (disregarding network effects problems in software markets)

the fact that (following the arguments of ARROW) i f ti k t t ti ll i f tinformation markets are systematically imperfect as those who want to sell digital information have to reveal part of the information for free. True demand (marginal socialof the information for free. True demand (marginal social benefit) higher than indicated by standard demand curve.

Part of the information and knowledge market ff f h f h h i dsuffers from the fact that the respective products are

“experience goods” or “confidence goods” where potential users find it quite difficult to indicate the value ofpotential users find it quite difficult to indicate the value of the respective goods. Hence there is a market for lemons problem in part of digital markets. Government could encourage reputation building/quality competition


encourage reputation building/quality competition

2 2 Theoretical Starting Points2.2. Theoretical Starting PointsIn fixed-line telecommunications most OECD countries, except for Finland

(and a few other cases), have a dominant incumbent firm. Potential Problems associated with the existence of a dominant position:Problems associated with the existence of a dominant position:

Refusal to deal: this is related to the essential facilities doctrine: an essential facility is a facility supplied on a monopoly basis which is required by competitors and cannot be reasonably duplicated by competitors for by co pet to s a d ca ot be easo ab y dup cated by co pet to s oeconomic or technical reasons. This problem of a monopolistic bottleneck often, is crucial.

Predatory pricing: the (dominant) operator charges prices below a l t t d d d th i id th t thi i t dinormal cost standard, and there is evidence that this is not sporadic or

reactive price-cutting. This strategy aims to keep newcomers at bay. Cross subsidization: the dominant firm uses revenues from a market in

which it is dominant to cross subsidize the price of a service or product itwhich it is dominant to cross-subsidize the price of a service or product it provides in other markets – thus impairing competitors and keeping out newcomers;

Tied sales/bundling: The dominant position of dominant firm in market Tied sales/bundling: The dominant position of dominant firm in market i is effectively transferred to other market j.

Excessive pricing: the price is above the level under competition so that there is a monopolistic element in pricing.


p p g

2.2. Theoretical Starting Points2.2. Theoretical Starting PointsFig. 3: Natural Monopoly/Economies of scalep,k’ p

A

Well known problems:

B pm

Output unter monopolymuch lower than undercompetition (point D);

i l O i i i E

G DH

social Optimum is point Ewhich, however, goes along with subsidies

p1

G D

EAC

MC (k’)

FH

R


DD00 MR0q2q1 q

2.2. Theoretical Starting Points2.2. Theoretical Starting PointsFig. 4: Network Effects and Natural Monopoly

pk'k Z

DDDD0

p0p1

IK

DD1

JE1 H G

kp

k´pE2

0 q0 q1 q2

X

R'0 (R'1)

k pF


2.2. Theoretical Starting Points2.2. Theoretical Starting PointsFig. 5:Subsidizing access makes sense for vertically integrated firm

q1,Qo is isolated cost-based pricing, qo,Q1 is superior (welfare)(a) (b)

A

q1,Qo is isolated cost based pricing, qo,Q1 is superior (welfare)

PA1 PL0KF F BE’ A’ D’

E’PA1

PA0

PL0

PL1 KL G C D EF’ B’ C’

DL0DL1

G C D EF B C

q0q1 Q1Q0 Q q 0 0Subsidized access=loss E‘A‘B‘F‘;recovered through long-distance price PL (FBCG=E‘A‘B‘F‘);


Subsidized access=loss E A B F ;recovered through long-distance price PLo(FBCG=E A B F );A‘B‘C‘+ABE-BDC =net welfare gain from access subsidization; cost-based pricing=problem

Welfare Aspects Laws about regulation/benefits often refer to direct

consumer benefits of provision of digital servicesconsumer benefits of provision of digital services (revenue 50-60% of the market in OECD); but...

...but: Most digital benefits to consumers acrue...but: Most digital benefits to consumers acrue indirectly to the user, namely through digital services which are input to 99% of the economy –

h l f l h ffi f h b i the volume of telephone traffic of the business community>private household traffic (but revenue share is lower). VOLUME dominance of business digital services ) gsuggests to emphasize indirect cost cutting effects; and product innovation aspects (combine dig. after-sale service with standard product=upward rotation of demand curve)


p p )

2.2. Theoretical Starting Points2.2. Theoretical Starting PointsMany OECD countries have adopted price regulations, typically in

th t t f t i l ti t tthe context of an asymmetric regulation strategy. Regulatory pricing rules imply, however, three types of costs:

Regulatory costs in the sense of bureaucratic costs at the egu a o y os s e se se o bu eau a os s a eregulatory agency

Cross-regulatory costs in non-regulated sectors where firms – normally used to only anticipate market actors’firms – normally used to only anticipate market actors behavior on the basis of the general competition framework –will have to consider some of the regulatory problems to the extent that the respective firms are using services provided inextent that the respective firms are using services provided in regulated industries as an input or are offering services which are complementary or a substitute to the services of the regulated sectorregulated sector.

Regulatory costs on the side of regulated firm (e.g. compliance costs)


2.2. Theoretical Starting Points2.2. Theoretical Starting PointsWhile a certain degree of policy autonomy is needed on

the side of the regulatory agency, the problem of shadow l ti h ld t b l k d hi h t d fregulations should not be overlooked which stand for

informal regulations difficult to detect: Thus government would be wise to limit the autonomy of Thus government would be wise to limit the autonomy of

the regulator in order to avoid the problem of “shadow regulations” which in many regulatory authorities in OECD countries are observed (shadowauthorities in OECD countries are observed (shadow regulations mean e.g. threats to introduce new regulations if certain types of behavior on the side of the incumbent continue). If shadow regulations affect the accesscontinue). If shadow regulations affect the access market they will contribute to a general rise of telecommunications prices – see the model in the appendixappendix.

The regulator would be wise to pursue a consistent and transparent policy which facilitates anticipation of the of the regulatory policies and remedies applied


of the regulatory policies and remedies applied.

Asymmetric Fixed Line yTelecommunications Market

1 In-cumbent

Several small firms

Many Newcomers


2.3. Efficiency in Oligopolistic Markets: conjectural demand curve in asym oligopolyconjectural demand curve in asym. oligopolyFig. 6: Modified Hitch-Sweezy Approach to Oligopoly

p, k´p, k´p, k´ Typical for many OECD countries: 1 industryp,p,p, Typical for many OECD countries: 1 industryLeader, many smaller firms following suit inan asymmetric way: will follow the leader ifit reduces the price but will not follow if the

AAA

it reduces the price, but will not follow if theleader raises the price: Thus demand curve in the upper part relatively elastic! (line ABC).Difference between E and B is relatively small;

A´ DD0A´A´ DD0

F‘

F

Difference between E and B is relatively small;Difference between marginal costs pricingand average cost pricing is not so crucial

p0B

E k

DD1p0

B

E k

p0B

E k

DD1

E‘

F

k´

C

k´

C

k´

C

Prof. Dr. P.J.J. Welfens, www.eiiw.eu 28q0 q0 q1q0 q0 q1q0 q0 q1

2.4. Achieving an Optimum through Differentiated Two part TariffsDifferentiated Two-part Tariffs

Towards bigger role for DIFFERENTIATED TPT The firm basically could adopt alternative price e bas ca y cou d adop a e a e p ce

strategies as follows:(i) standard monopoly pricing(i) standard monopoly pricing(ii) full price differentiation(iii) cost oriented uniform price setting(iii) cost-oriented uniform price setting(iv) two-part tariff setting( ) diff ti t d t t t iff tti lit i(v) differentiated two part tariff setting; ≈ reality in

mobile telecomms; but Regulator in fixed telec. NO!


2.4. Achieving a Welfare Optimum through Differen-tiated Two-part Tariff (for uniform TPT: Knieps 1998)tiated Two-part Tariff (for uniform TPT: Knieps, 1998)

Fig. 7: Output and Welfare Effect of Introducing a Differentiated Two Part Tariff

p

A’’

Assumption: FIXED COSTS PTUN, low volume user I, highvolume user II. Uniform price, then demand is qI, qII.Uniform two-part tariff brings a modest wellfare gain.S i l ti i h d if th i diff ti t d (i

AA’

Social optimum is reached if there is differentiated (in-dividual) two part-tariff: Access card price for I is equal toPQRN, the demand of I now equal to distance NS; user IIgets access card at lower price QTUR; overall demand q

p W

DDI DDII DDI+IIgets access card at lower price QTUR; overall demand qZ

N

Q

R S U V

TW

X

X’ k’0

N

0 qI qII qV qX qZ q

R S Z’ Z’’

U V XZ’’’


0 q q q q q qUniform 2-part tariff=for II „card“ PTUN+calls at k‘: II=qV;gain=TVU; diff:+QRS+PQRN

3 1 Regulatory Developments in the US3.1. Regulatory Developments in the US

The US 1996 Telecommunications Act is the basis for regulation and consists of several key elements which differ from the EU approach (Stockdale, 03;which differ from the EU approach (Stockdale, 03; OPTA, 2005). Competitive services, structural safeguards, equal access

requirementsrequirements Access regulation is based on access to unbundled network elements

(UNEs) while the EU approach puts more emphasis on wholesale services

Supply obligations are imposed on operators which stand for a broadly dominant position while the EU framework of 2002 puts emphasis on significant market dominance in – 18 pre-defined –

k tmarkets the US approach brings obligations to supply a particular unbundled

network element or several such elements only if this is considered to be a pre requisite for competition


be a pre-requisite for competition

In the late 1990s the US approach has basically emphasizedIn the late 1990s the US approach has basically emphasized services competition, while infrastructure-based competition was adopted after the collapse of the New Economy bubble in 2000/01:New Economy bubble in 2000/01:

the FCC has at first emphasized in many cases that incumbent local exchange carriers (ILECs) should offer local unbundling and offer resale; and the FCC has required that ILECs offer UNE-P (consistingresale; and the FCC has required that ILECs offer UNE P (consisting of use of both the access network and the facility of the local switch run by the ILEC) so that by early 2005 about 10% of the 180 million exchange lines in the US were organized within UNE-P rules.th FCC h f d li h i th t tit (CLEC ) ldthe FCC has favoured line sharing so that competitors (CLECs) could use against a modest rental fee the high frequency part of the local loop for broadband access while the ILEC was continuing provision of voice telephony over the remaining low frequency part of the loop


voice telephony over the remaining low frequency part of the loop

3 1 Regulatory Developments in the US3.1. Regulatory Developments in the USThe FCC has shifted in the Triennial Review Order of

2003 and some other rulings its focus towards infrastructure-based competition as fixed line network operators argued thatbased competition as fixed line network operators argued that cable TV operators were the leading suppliers of broadband services in the residential sector and had no UNE-obligations –and indeed the FCC rules state at the beginning of the 21stand indeed the FCC rules state at the beginning of the 21st century: no requirements to supply UNE-P arrangements and no requirements

f ILEC t l b dl d l t f it fib t th hfor ILECs to supply unbundled elements from its fibre to the home or fibre to the kerb facilities

when replacing copper loop access network with fibre ILECs have no requirement to maintain existing rented local loops or offer substituterequirement to maintain existing rented local loops or offer substitute products to competitors

as regards ILECs they are obliged to give their competitors access to all except the largest office blocks, but there is no obligation to offerall except the largest office blocks, but there is no obligation to offer dark fibre or interconnect links.

The basic aim of this new strategy is to stimulate investment in new broadband infrastructure in the US


new broadband infrastructure in the US.

3.2 Regulatory Developments in Europe3 egu a o y e e op e s u ope

In the UK OFCOM – in the consultation document ofIn the UK OFCOM in the consultation document of November 25, 2004 - has adopted an approach which puts emphasis rather oninfrastructure and less on the regulation of markets OFCOM considers with respect to nextof markets. OFCOM considers with respect to next generation networks four principles and emphasizes that BT should give access to bottlenecks:

promoting competition at the deepest possible level within the promoting competition at the deepest possible level within the infrastructure network

emphasizing regulation in a way which brings equality of access to facilities and services which are suffering from insufficientfacilities and services which are suffering from insufficient competition (equivalence approach)

eliminating regulations where competition is working encouraging efficient and timely investment encouraging efficient and timely investment the incumbent operator BT should provide access to competitors

where bottlenecks are relevantUK seems to want a nationally somehow integrated open telecomms networks; unstable


UK seems to want a nationally somehow integrated open telecomms networks; unstablealliances to be expected; British model is rather doubtful (hypothesis)!

EU Regulatory Framework 5 Directives; NRA have considerable autonomy but must present market 5 Directives; NRA have considerable autonomy, but must present market

analysis on – initially - 18 pre-defined markets (potentially others, too) Process of notification is still underway/progress across EU countries differs Partly unclear division of labor between national competition authorities and Partly unclear division of labor between national competition authorities and

regulatory agencies Innovative telecommunications services should not be subject to

unnecessary regulatory burden Institutional convergence/best practice diffusion in EU27? Facilities-based competition – e.g. emphasized by OPTA – vs. regulating

telecommunications with focus on services (REGTP/BNetzA); in Germany bl ith l l l b dli DSL fli t V hi h Bit R tproblems with local loop unbundling DSL; conflict over Very high Bit Rate

Digital Subscriber Line network in Germany; incumbent has argued that VDSL investment should be exempt from regulation; moreover, reluctance to stimulate VOIP/Internet Telephony VDSL subject to regulation in 2010to stimulate VOIP/Internet Telephony. VDSL subject to regulation in 2010.

EU Framework could consider welfare aspects of overall EU27(?), but does not! E.g. cross-border network effects are not considered in regulatory policies! More competition in fragmented national markets or in integrated


p p g gEU market – difficult challenges as structure of national markets differ

3 2 Regulatory Developments in Europe3.2 Regulatory Developments in Europe

Fig. 8: The Role of Alternative Providers in Telecommunications in EU15

Access Market is the real problem; exceptions are NL (cable!) partly UK (cable)


Access Market is the real problem; exceptions are NL (cable!), partly UK (cable)

4. Conclusions4. ConclusionsThe main conclusions concern the field of e-The main conclusions concern the field of e

communication and the suitable strategies in regulation. If one wants to achieve sustained competition in telecommunications/ecompetition in telecommunications/e-communication in the digital economy one should adopt a regulatory approach which emphasizes adopt a egu ato y app oac c e p as essustainability of competition. This implies that in the early stage of market opening up there is a relatively strong need for regulation in particular inrelatively strong need for regulation, in particular in the access market.

Regulation of digital markets is to some extentRegulation of digital markets is to some extent necessary, but unnecessary regulation should be avoided. Political Economy of NRAs imply i k f l ti


risk of overregulation

Further ConclusionsI th th t th fi d li t l i ti In the case that the fixed-line telecommunications market effectively is characterized by an asymmetric oligopoly with a behavior asasymmetric oligopoly with a behavior as described in the HITCH-SWEEZY approach, one could consider not applying any pricecould consider not applying any price regulation at all. Rules for interconnection would be the only major field of regulation in this casey j g

Since it is unlikely that an asymmetric oligopoly is a stable market structure the regulatory authority gshould be maintained in any case as a critical watchdog of competition.


Further Conclusionsh h l l l l d d d k f ll At the wholesale level and in end-product markets one carefully

should consider strong incentives for differentiated two-part tariffs. With DTPT there will be price differentiation andtariffs. With DTPT there will be price differentiation and less (price) regulations necessary

Th EU f k f l ti d l t li i EU The EU framework for regulation and regulatory policy in many EU countries lacks theoretical underpinning and so far has neither adequately considered the oligopoly problems in fixed-line telecomm nications no the option of foste ing diffe entiated t o pa ttelecommunications nor the option of fostering differentiated two-part tariffs which would allow the minimization of regulations.

Applying DTPT in practice might face some problems due to problems ith b dli b idi ti twith bundling, cross-subsidization etc.


Summary Conclusions

Define Broadband Universal Service (?)

In the EU needIn the EU needfor broad regu-lation; less focuson rather narrow

Explore Differentiated T t T iffon rather narrow

market definitions2006 EU REVIEW

Two-part TariffsConsider Hitch-SweezyModel in Fixed-line Tel.

More International Cooperation/Triade or Transatlantic Regulatory Dialogue(increasing internationalization/growing Foreign Direct Investment/VOIP...)


(increasing internationalization/growing Foreign Direct Investment/VOIP...)

EU Welfare Effects

Some reflections on welfare aspects Indirectly: Effect on domestic static and dynamic efficiency National and international network effects IN EU unclear how international welfare effects could be

treated adequately at the national level if outward FDI and the respective profits are included regulatory

policy gets closer to industrial policy; if there are oligopolistic EU markets competition dynamics or cross if there are oligopolistic EU markets competition dynamics or cross

border network effects one cannot be adequately assessed at the national level


Topics RemainingTopics Remaining... Role of sunset clauses

Ti i i “ ( f i t ti i ith t) „Time progressive price“ (p for interconnection rises with t) as incentive for stimulating infrastructure investment (NL mobile telecommunications market)ob e te eco u cat o s a et)

How important are scale economies really? Is there a Schumpeter innovation advantage for big firms p g g

valid in the telecommunications sector/equivalent implication through existence of network effects?Can one consolidate the 18 markets in EU scheme? Can one consolidate the 18 markets in EU scheme?

Policy assignment supranational & national level Mobile roaming price caps; create secondary licence market Mobile roaming price caps; create secondary licence market Network neutrality (particularly US/EU)... research agenda

in the digitally networked society/ICT ECONOMY


g y y/

18 Relevant Markets according to recommendations of Europeanrecommendations of European Commission (clustering follows Briglauer)Commission (clustering follows Briglauer)

Fixed line telophony market at the retail level: 1) access to public telephone network at fixed locations: for

residential customers 2) as 1) but for non-residential customers 3) publicly available local and/or national telephone services

id d t fi d l ti f id ti l tprovided at a fixed location for residential customers 4) as 3) but refering to international tel. services

5) 3) b t f i t id ti l t 5) as 3) but refering to non-residential customers 6) as 3) but refering to international services & non-res. c.


Relevant fixed telephone markets t th h l l l l (7 9) dat the wholesale level (7-9) and

Fixed Data Markets (10 and 11)Fixed Data Markets (10 and 11)

Relevant Fixed Telephone at Wholesale Level Relevant Fixed Telephone at Wholesale Level 7. Call origination on the public telephone network

provided at a fixed locationp o ded at a ed ocat o 8. Call termination on individual public telephone networks

provided at fixed location9 Transit servics in the fixed public tel network 9. Transit servics in the fixed public tel. network

FIXED Data Markets 10 wholesale unbundled access (ULL) 10. wholesale unbundled access (ULL) 11. Wholesale bitstream access for the purpose of

providing broadband services


Relevant Leased Line Markets atRelevant Leased Line Markets at the Retail and Wholesale Level

The minimum set of leased lines (retail level) Wholesale terminating segments of leased

lineslines Wholesale trunk segments of leased lines


Relevant (wholesale) mobile ( )market

15. Access and call origination on public mobile tel. networks

16 Voice call termination on individual 16. Voice call termination on individual mobile networks

17. The wholesale national market for international roaming on public mobile g pnetworks


2010 Revisions at EU Level

Number of relevant markets has decreased (EU recommendation)

European regulatory group (national European regulatory group (national regulators cooperate)


Issues Network neutrality: in the internet – no

differentiation with respect to conveying signals (e.g. p y g g ( ghigh-data volume video vs. voice?)

Broadband expansion Broadband expansion Universal services:

Which definition How to finance low density regions How to finance low density regions Digital globalization – harmonizing competition

policies in EU US China Japan?; role of ITUpolicies in EU, US, China, Japan?; role of ITU Digital divide? Prof. Dr. P.J.J. Welfens, www.eiiw.eu 48

App. 1: Welfare Gains from Introducting Differentiated Two-part TariffsDifferentiated Two-part Tariffs

If we assume constant marginal costs, k’, we can easily g , , ycalculate the welfare gain from a switch to a differentiated two part tariff. (One may also assume that average fixed cost F=k’(1+f’) where f’ is a parameter indicating the ( ) p grelative size of average fixed cost.) Let us consider the case of a demand function p=a-bq and marginal costs k’=f. The intersection point of the sum of the marginal costs and theintersection point of the sum of the marginal costs and the average fixed cost curve with the demand curve is given by q# = (a-(f+F))/b. It is well known that the consumer rent (Ω) in the case of pricing in line with marginal costs f is(Ω) in the case of pricing in line with marginal costs f is given by Ω = (a/2)(a-f)2/b. The increase in consumer rent associated with a switch from a uniform two part tariff to a differentiated two part tariff can be calculated bydifferentiated two part tariff can be calculated by substracting the triangle AQP from the triangle ASN:

(1) dΩ= (a/2)(a-f)2/b – (a/2)(a-(f+F))2/b=(a/2b) (2aF-2fF-F2) (2F 2fF/a F2/a) /2b


F2)= (2F-2fF/a-F2/a) /2b

App. 2: Modelling the Problem of Regulatory Uncertainty – at the Level of Intermediate Inputs(average costs c’; E(R) is expected Reg.)

Assumption: risk-averse managers are maximizing profits in the end-user market

(I) μ = pq – WL(q) – E(R)c’f(q)(II) σ = c’f(q) σ R( ) (q) R(III) U(μ, σ) = U(pq – WL(q) – E(R)c’f(q), c’f(q) σR)(IV) U (p WL E(R)c’f ) + U c’f σ = 0(IV) Uμ (p-WLq – E(R)c fq) + Uσ c fq σR = 0(IV’) p = E(R)c’fq + WLq - (Uσ/Uμ)c’fq σR

Firm considered is regulated in the intermediate product market only. The firm Maximizes expected utility of proifts; profit function U in which the expectation value μ enters with a positive sign; standard deviation σ of profits with negative signμ p g ; p g gFirm in the end user market offers q at price p, uses labor input L at nominal wage WWhile buying intermediate input at a price equal to average costs c‘ times a regulatoryimpact factor E(R); expectation value E(R) is unity. The more uncertain regulation R, the


higher will be the offer price in the end-user market

Prof. Dr. Paul JJ Welfens , EIIW/Bergische Universität WuppertalEIIW/Bergische Universität Wuppertal

Breitbandexpansion und IKT-Modernisierung

1. Breitbandexpansion als Chance 2 IKT-Innovationsdynamik und 2. IKT Innovationsdynamik und

Clusterbildung 3. IKT-Beziehungsnetze im EU-Vergleich 4. Perspektiven für das Bergische 4. Perspektiven für das Bergische

Städtedreieck und Nordrhein-Westfalen


EIIW: Info zu Institut/2 /Projekte

EIIW Internetwirtschaft 2010 - auch Buch Für die Bundesregierung, siehe auch nat. IT-Gipfel Projekt in Kooperation mit FhG-ISI Karlsruhe Projekt in Kooperation mit FhG ISI, Karlsruhe

Projekt mit der Hans Böckler Stiftung 09/10 Regionales EU-Vergleichsprojekt bei Sektoren IKT

und Automobilwirtschaft; NRW: Berg. Städte, Do.m. Abschlussbericht/Buch (in LISTE eintragen; e-

mail=Kurzbericht erhältlich kostenlos))


Breitbandexpansion als h f f kChance: auf Infrastruktur

mehr und mehr neue Dienstemehr und mehr neue Dienste 1) Breitbandexpansion ist Teil des Wachstums

der Informations- und Kommunikationstechnologie (IKT)Kommunikationstechnologie (IKT)

2) IKT hat in den späten 90er Jahren in d USA 1% P kt W h tden USA 1%-Punkt zum Wachstum beigetragen; in D. nur 0.3 Prozentpunkte

3) Breitbandexpansion ist geeignet, um neue, hochwertigere bzw. innovative Dienstehochwertigere bzw. innovative Dienste zu lancieren Prof. Dr. P.J.J. Welfens, www.eiiw.eu 53

Breitbandexpansion: pWirkungen

S h ll K ik ti• Digitale Inputebene+

Schnellere Kommunikationg p

• Private Hh: Nutzenplus

Hochwertigere Vernetzung bzw. Netzwerkbildung

• Neue digitale Märkte• Innovationsdynamik +

Breitbandexpansionschafft digitale Ungleichheit

• Netzwerkneutralität?schafft digitale Ungleichheit, solange kein Universaldienst

• Universaldienstdef.(EU)


IKT-Cluster-Ansatz in NRW etc. Cluster als regionale Vernetzungsinitiativeg g

Mit nationalem/internat. Führungsunternehmen Heterodox“: Ohne Führungsakteur Wirtschaft „Heterodox : Ohne Führungsakteur Wirtschaft Mit vs. ohne Beteiligung von Universitäten

Gute Struktur bzw. adäquates Clustermanagement hilft via Cluster g Regional-Innovationsdynamik bzw. –BIP zu stärken

Standortqualität zu verbessern (Investitionszuflüsse Standortqualität zu verbessern (Investitionszuflüsse, Zuwanderung; Neugründungen)Cl t k i ti h h V li fi Cluster kann innovationsschwache Verliererfirmen anziehen… Prof. Dr. P.J.J. Welfens, www.eiiw.eu 55

IKT-Dynamik in ausgewählten y gEU-Regionen

IKT kt lb t i ti +A d kt IKTsektor selbst innovativ; +Anwendersektoren IKT-Dynamik besteht aus normalen digitalen y g

Innovationen (ohne Patentschutz, ggf. copy-rights) und auch Low-tech-Expansion ( Netzwerke)rights) und auch Low tech Expansion ( Netzwerke)

Kern industrieller IKT-Dynamik erfasst über Patentanmeldungen Wissens- bzw. Erfindervernetzungeng Mobilität der Erfinder im IKT-Sektor

Cross Innovation Cross-InnovationProf. Dr. P.J.J. Welfens, www.eiiw.eu 56

Befunde:Befunde: Region Bergisches Städtedreieck hat

aufgeholt: Innovationsposition besser als Dortmund in 2000-08o t u d 000 08

IKT- im Städte3eck: Netzwerkbildung funktioniert ansatzweise aber noch Potenzialfunktioniert ansatzweise – aber noch Potenzial IHK + IKT-Firmen gefordert NRW gefordert Bund (nationaler IT-Gipfel) & EU gefordert Bund (nationaler IT Gipfel) & EU gefordert EIIW als Impulsgeber bzw. Netzwerkpartner

= Standortentwicklungspartner= Standortentwicklungspartner Prof. Dr. P.J.J. Welfens, www.eiiw.eu 57

Regionalperspektive IKT g p pBergisches Städtedreieck

EU-Projekt (Strukturfonds); IHK/Kompetenz3 !! Erhöhung der regionalen Wachstumsrate Erhöhung der regionalen Wachstumsrate IKT-Vernetzung international im

BergischenStädtedreieck zu befördern Unternehmen gefordertg Hilfe von ZENIT für Partnerung in Anspruch nehmen

Uni /Städtepartnerschaften gezielt ausbauen Uni-/Städtepartnerschaften gezielt ausbauen In Universität INFORMATIK stärken IKT als Weiterbildungsschiene =regionales Projekt


Nutzen Sie die EIIW-Expertise bzw. unsere Analyse-Werkzeuge = schneller, besser und mit mehr Rentabilität zum Ziel schneller, besser und mit mehr Rentabilität zum Ziel

Danke für Ihre

Aufmerksamkeit

Prof. Dr. P.J.J. Welfens, www.eiiw.eu 59www.eiiw.eu www.econ-international.net

paul j.j. welfens · to high sunk costshigh sunk costs (r&d and marketing expenditures are(r&d and...

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