the effects of forced handset unbundling on output and price in
TRANSCRIPT
The Effects of Forced Handset Unbundling on Output and Price in Mobile Sector:
----An Empirical Study with International Data
Zhong Liu, PhDAssociate Professor, School of Business Administration
2009-11-17 Zhong Liu 2
Such a sector with astonishing growth
The global number of mobile subscribers overtook that of landline in 2001
It cost only 20 years for mobile to acquire 1bn subscribers. In contrast, it cost 125 year for landline to do so in the world
The global number of mobile subscribers was 2bn in 2005, 3bn in 2007 and 4bn in 2008 (accelerated growth)
Mobile service revenues reached US$364bn in 2002, US$506bn in 2004 and US$636bn in 2006
Source: ITU
2009-11-17 Zhong Liu 3
Handset bundling (related)
Mobile operators sell services with handset together (or tying in economic term). Concurrently,
Often operators may offer handset subsidies in exchange of subscribers’ long-term commitments (Early termination Fee may apply);
Operators may often lock handsets so that those handsets cannot be used in competing networks of the same standard if without unlocking
Operators may not allow subscribers to use handsets, which subscribers purchase from the third party, on their networks,
Operators may pre-program handsets to disable some functions (for example, WiFi or Skype) so that those functions cannot be used in their specific networks.
2009-11-17 Zhong Liu 4
Advocates of forced unbundling
With reference to Carterfone principle in landline sector, they require regulators
To prohibit operators from locking handsets (Wireless Carterfone)
To order operators to allow any equipments/applications running on their network, subject to not incurring damage (Basic Network Neutrality)
Doing so, they claim,
can increase choices by customers – meaning lower rate and higher call volume (output)
can promote innovation (handset and value-added services)– meaning lower rate and higher call volume
The most influential academic article was written by Tim Wu (2007) who claims that four areas warrant particular attention in mobile sector --
Network attachment
Product design and feature crippling
Discriminatory Broadband Services
Applications stall
FCC has partially adopted their requirements in the bidding design for 700Mhz spectrum (Band C), which was vacated from digital television conversion (Digital Dividends).
2009-11-17 Zhong Liu 5
Opponents of forced unbundling
They argue that bundling can encourage investment and innovation because of long-term commitments from subscribers (in exchange of subsidies)
Network investment and innovation: Standard cannot replace complicated coordination between handsets and network
iPhone and Apple Store – Walled Garden in the US – but the most innovative case in wireless sector
Forced open access not succeeded in the broadband access sector of the USA
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Economic theories: non-conciliatory
On the one hand, vertical integration (tying)
Can solve the issue of hold up
Can lead to risk sharing
Can solve the issues related to incomplete contracts
See Williamson（1975）,Holmstrom and Tirole（1989）,Perry （1989）,Newbery and Stiglitz（1981）,Grossman and Hart（1986）,Hart and Moore（1990）
On the other hand, in a vertical integration setting,
The vertically-integrated firm can foreclose its competitors from competitive sector
Locking can reduce social welfare
See Tirole（1988,Tirole and Laffont(2000), Armstrong, Cowan and Vickers(1994), Rey and Tirole(2003), Klemperer（1987, 2006）
2009-11-17 Zhong Liu 7
Previous empirical studies
All are one-unit study
On Finland
Tallberg,et al, Impacts of Handset Bundling on Mobile Data Usage : the Case of Finland, Telecommunications Policy 31 (2007) 648-659.
On South Korea
Kim, et al. 2004. Mobile handset subsidy policy in Korea: historical analysis and evaluation, Telecommunications Policy 28 (2004) 23–42.
On Portugal
Handset Subsidies – an Empirical Investigation commissioned by Portuguese Competition Commission
This study attempts to fill the gap of multi-unit econometric analysis
2009-11-17 Zhong Liu 8
International practice
In 1999Q4-2004Q2, among 30 countries (economies)
In Belgium and Finland, operators were prohibited from bundling unconditionally (no subsidies, no-locking)
In Singapore， operators were prohibited from bundling unconditionally (subsidies allowed but locking prohibited)
In Hong Kong, handset locking is allowed when subsidized; otherwise illegal
Thus, we design
Test 1： dummy variable of unlock1=1 for Belgium, Finland ,Singapore and Hong Kong；unlock1=0 for others
Test 2： dummy variable of unlock2=1 for Belgium, Finland ,Singapore；unlock2=0 for others
Test 3： dummy variable of unlock3=1 for Belgium, Finland； unlock3=0 for others
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Null Hypotheses (H0
)
If forced unbundling can realize its anticipated goals，
Those economies with forced unbundling can achieve higher output, or
Those economies unbundling can achieve lower rate
2009-11-17 Zhong Liu 10
Output Equation（Test 1 as an example）
0 1
1 1
: 0: 0
HH
0 1 2 32
4 5
26 7
28 9
102
11 12
13
14 , 1
log 1
log log
log log
log log
log loglog
log
it it it
it it
it it
it it
it
it it
it
i t
Q U N LO C K M N P RPP
H H I H H I
D EN SITY D EN SITY
SPEC TRU M SPEC TRU MFIXED RATE
G D PPC G D PPCPO PU LATIO N
Q
15 , 2log Q Qi t i itQ
2009-11-17 Zhong Liu 11
Price Equation（Test 1 as an example）
0:0:
11
10
HH
0 1 2 3
2 24 5 6 7
28 9
210 11
12
13
14 15
log 1
log log log log
log log
log log
log
log l
it it it
it it i i
it it
it it
it
it
it
RPM UNLOCK MNP RPP
HHI HHI HHI HHI
DENSITY DENSITY
SPECTRUM SPECTRUMFIXEDRATE
GDPPC
POPULATION
2
16 , 1
og
logit
P Pi t i it
POPULATION
RPM
2009-11-17 Zhong Liu 12
Variables
Q：monthly total outputRPM：revenue per minute –
a surrogate for price
HHI：Herfindahl-Hirschman Index, reflecting sector concentration
DENSITY：population densitySPECTRUM：total spectrum for mobile sectorFIXEDRATE: the log of the rate of three-minute call of
landline at peak timeGDPPC：GDP per capita (at PPC –
purchase power parity)
POPULAION：populationMNP：mobile number portabilityUNLOCK1-3：as introduced beforeRPP: Receiving party payment
2009-11-17 Zhong Liu 13
Descriptive statistics (part)
Variables Obs. Mean St. Error Min. Max.logq 491 7.02 1.13 4.34 11.26
logq_norm 491 6.88 1.28 -1.97 11.26
logrpm 482 3.02 0.41 1.95 4.81
logrpm_norm 482 2.84 0.49 1.36 4.79
unlock1 540 0.13 0.34 0 1
unlock2 540 0.10 0.30 0 1
unlock3 540 0.07 0.25 0 1
mnp 538 0.26 0.44 0 1
loghhi 540 8.24 0.33 7.05 9.10
logdensity 540 4.26 1.74 0.69 8.82
logspectrum 540 5.06 0.54 3.59 6.27
fixedrate 526 1.99 0.96 0.00 3.10
loggdppc 540 2.99 0.52 1.62 3.63
logpopulation 540 2.90 1.17 1.32 5.67
2009-11-17 Zhong Liu 14
Results (output equation，part)Test1 Test2 Test3
Variable RE_RO PCSE PWGH RE_RO PCSE PWGH RE_RO PCSE PWGH
alpha1 co-ef 0.003 0.003 -0.005 -0.009 -0.009 -0.021 -0.005 -0.006 -0.015
p 0.93 0.83 0.92 0.79 0.51 0.61 0.90 0.63 0.76
mnp co-ef 0.019 0.019 0.012 0.017 0.018 0.011 0.018 0.018 0.011
p 0.04 0.07 0.34 0.08 0.08 0.42 0.05 0.08 0.38
rpp co-ef 0.107 0.112 0.106 0.110 0.115 0.110 0.107 0.111 0.104
p 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
loghhi co-ef -1.388 -1.444 -1.694 -1.420 -1.478 -1.749 -1.411 -1.469 -1.724
p 0.00 0.06 0.00 0.00 0.05 0.00 0.00 0.05 0.00
loghhi_s q co-ef 0.088 0.091 0.108 0.090 0.093 0.112 0.089 0.093 0.110
p 0.00 0.06 0.00 0.00 0.05 0.00 0.00 0.05 0.00
logq1 co-ef 0.911 0.862 0.722 0.910 0.859 0.726 0.911 0.860 0.723
p 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
logq2 co-ef 0.006 0.052 0.178 0.008 0.056 0.176 0.007 0.055 0.178
p 0.86 0.70 0.00 0.82 0.68 0.00 0.84 0.68 0.00
constant co-ef 5.903 6.137 7.515 6.014 6.253 7.703 5.981 6.222 7.607
p 0.00 0.03 0.00 0.00 0.03 0.00 0.00 0.03 0.00
R-square overall 0.99 0.99 0.99
1
2009-11-17 Zhong Liu 15
Results (price equation，part)
Variable
Test1 Test2 Test3
RE_RO PCSE PWGT RE_RO PCSE PWGT RE_RO PCSE PWGT
beta1 co-ef -0.014 -0.014 -0.014 -0.020 -0.020 -0.020 -0.014 -0.014 -0.016
p 0.50 0.26 0.56 0.27 0.20 0.38 0.52 0.30 0.54
mnp co-ef 0.004 0.003 0.005 0.004 0.003 0.006 0.003 0.003 0.005
p 0.75 0.79 0.64 0.75 0.78 0.61 0.75 0.80 0.64
rpp co-ef 0.075 0.078 0.088 0.081 0.083 0.093 0.075 0.078 0.088
p 0.08 0.10 0.06 0.06 0.09 0.05 0.08 0.10 0.06
loghhi co-ef 3.839 4.062 4.417 3.838 4.038 4.426 3.871 4.089 4.471
p 0.05 0.07 0.01 0.05 0.07 0.02 0.05 0.06 0.01
loghhi_s q co-ef -0.229 -0.241 -0.263 -0.229 -0.240 -0.264 -0.230 -0.243 -0.267
logrpm1 co-ef 0.860 0.854 0.847 0.860 0.855 0.847 0.860 0.855 0.847
p 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
constant co-ef 3.428 3.582 5.286 3.085 3.211 5.107 3.369 3.516 5.305
p 0.10 0.29 0.03 0.14 0.33 0.04 0.10 0.30 0.03
R-square overall 0.94 0.94 0.94
2009-11-17 Zhong Liu 16
Marginal effects at mean of HHI of economies （part）
logq_norm logrpm_norm
country idn effect P>|t| turning effect P>|t| turning
Greece 13 ‐0.501 0.50 8.26 0.366 0.31 8.37
Hong Kong 14 ‐0.617 0.42 7.78 ‐0.652 0.35 7.24
Hungary 15 ‐0.433 0.67 8.54 0.972 0.10 9.04
Ireland 16 ‐0.408 0.72 8.64 1.185 0.09 9.28
Italy 17 ‐0.457 0.61 8.44 0.759 0.11 8.80
Sweden 25 ‐0.470 0.58 8.38 0.642 0.14 8.67
Switzerland 26 ‐0.393 0.75 8.70 1.321 0.09 9.43
UK 27 ‐0.567 0.39 7.99 ‐0.214 0.65 7.72
US 28 ‐0.737 0.57 7.29 ‐1.709 0.20 6.06
Venezuela 29 ‐0.433 0.67 8.54 0.972 0.10 9.04
Chile 30 ‐0.510 0.48 8.22 0.290 0.41 8.28
Mean ‐0.478 0.586 0.577 0.234
Median ‐0.472 0.575 0.629 0.141
Std Dev 0.075 0.115 0.663 0.188
2009-11-17 Zhong Liu 17
Marginal effects at each country (chart)
Quantity Equation, Log HHI
‐0.800
‐0.600
‐0.400
‐0.200
0.000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logq_norm
Price Equation, Log HHI
‐2.000‐1.500‐1.000‐0.5000.0000.5001.0001.5002.000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logrpm_norm
2009-11-17 Zhong Liu 18
Marginal effects at each country (chart)Quantity Equation, Log GDPPC
0.000
0.500
1.000
1.500
2.000
2.500
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logq_norm
Price Equation, Log GDPPC
0.000
0.100
0.200
0.300
0.400
0.500
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logrpm_norm
表述结果
2009-11-17 Zhong Liu 19
Marginal effects at each countryQuantity Equation, Log Fixed Rate
‐0.150‐0.100‐0.0500.0000.0500.1000.1500.2000.250
Arge
ntina
Austr
iaBr
azil
Colom
biaDe
nmark
Fran
ceGr
eece
Hung
aryIta
lyNe
ther
lands
Norw
aySin
gapo
reSw
eden UK
Vene
zuela
logq_norm
Price Equation, Log Fixed Rate
0.0000.0500.1000.1500.2000.2500.3000.350
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logrpm_norm
表述结果
2009-11-17 Zhong Liu 20
Marginal effects at each countryQuantity Equation, Log Density
‐0.200
‐0.100
0.000
0.100
0.200
0.300
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logq_norm
Price Equation, Log Density
‐0.300
‐0.200
‐0.100
0.000
0.100
0.200
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logrpm_norm
2009-11-17 Zhong Liu 21
Marginal effects at each countryQuantity Equation, Log Spectrum
‐2.000
‐1.500
‐1.000
‐0.500
0.000
0.500
1.000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logq_norm
Price Equation, Log Spectrum
‐1.500
‐1.000
‐0.500
0.000
0.500
1.000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logrpm_norm
2009-11-17 Zhong Liu 22
Marginal effects at each countryQuantity Equation, Log Population
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
logq_norm
Price Equation, Log Population
‐0.600‐0.400‐0.2000.0000.2000.4000.600
Arge
ntina
Austr
iaBr
azil
Colom
biaDe
nmark
Franc
eGr
eece
Hung
aryIta
lyNe
therla
nds
Norw
aySin
gapo
reSw
eden
UK Vene
zuela
logrpm_norm
2009-11-17 Zhong Liu 23
Conclusion
No conclusive econometric evidence to demonstrate that forced bundling can achieve higher output and lower rate
These results are evidenced by the recent deregulation of the following countries
Finland
Hong Kong
South Korea
Belgium (very recently)
Since regulation is costly, Wireless Cartefone should not be applied at least now. Let market do !
2009-11-17 Zhong Liu 25
附
基本形式
国家/地区1和2
2 21 2 3 4
1 2 3 42 2
it it it i i
i
y x x x xdy x xdx
1 2 1 3 4 1
1 2 2 3 4 2
2 2
2 2
dy x xdxdy x xdx