Tuesday, May 26, 2015

The telecommunications debate

There has been an important debate in the analysis of the telecommunications industry that goes back at least since the mid 1990s. The debate has implications also for other regulated infrastructures, such as energy or railways, and it is about the optimal degree of modularity of the industry. In the past, telecommunications firms were vertically integrated and heavily regulated. Technological progress has made it possible to introduce competition in some segments, but naturally monopolistic bottlenecks remain. Some economists and industry experts believe that the access of entrants to the infrastructure of incumbents should be forced and regulated, following the theory of the "ladder of investment" in Europe: entrants start by using the infrastructure of the incumbent, and little by little invest in more network elements. Others believe that vertically integrated firms should be free to reach agreements with others: In the US, this is the model that has prevailed, after some years with forced unbundling. In a workshop organized by the Institute of Economics of Barcelona and the think tank FEDEA, I discussed an important paper presented by Mattia Nardotto, which analyses the effects of unbundling telecommunications in the UK. In particular it finds negligible effects of unbundling on broadband (fast internet) penetration, and significant effects on the speed of broadband connections. Although there is no claim in terms of welfare analysis, the final view is positive for unbundling. That contrasts with research by Sidak and Vassallo (along the lines of previous work by Sidak) which claims that the short run benefits of unbundling in terms of prices are more than outweighed by long term costs in terms of reduced investment incentives for the incumbent. An interesting issue in the UK is that forced unbundling was accompanied by forced functional vertical separation of the wholesale and retail segments of British Telecom and increased regulatory scrutiny of the wholesale activities, to some extent reversing the privatisation of BT in the 1980s. These are some references I proposed to the audience to relate the paper by Nardotto and his co-authors to these broader issues:
Bacache, Bourreau, Gaudin (2014), Dynamic Entry and Investment in New Infrastructures: Empirical Evidence from the Fixed Broadband Industry”, Review of Industrial Organization.

Briglauer, Frübing, Vogelsang (2015), The impact of alternative public policies on the deployment of new communications infrastructure: A survey.”

Coublucq, Ivaldi, McCullough (2013), Static-Dynamic Efficiency Trade-Off...” in Railways

Frischmann & Hogendorn (2015), “The Marginal cost Controversy,” Journal of Economic Perspectives.

Sidak & Spulber (1997), “Deregulatory Takings and the Regulatory Contract,” MIT Press.

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