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ACCESS PRICING: THEORY AND PRACTICE Edited by RALF DEWENTER Helmut-Schmidt-University Hamburg, Hamburg, Germany and JUSTUS HAUCAP Ruhr-University of Bochum, Bochum, Germany jSpIlI ELSEVIER Amsterdam • Boston • Heidelberg • London • New York • Oxford Paris • San Diego • San Francisco • Singapore • Sydney • Tokyo

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Page 1: jSpIlI - GBV

ACCESS PRICING: THEORY AND PRACTICE

Edited by

RALF DEWENTER

Helmut-Schmidt-University Hamburg, Hamburg, Germany

and

JUSTUS HAUCAP Ruhr-University of Bochum, Bochum, Germany

jSpIlI

ELSEVIER Amsterdam • Boston • Heidelberg • London • New York • Oxford Paris • San Diego • San Francisco • Singapore • Sydney • Tokyo

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Contents

List of Contributors xv Preface and Acknowledgements xix

Chapter 1 Access Pricing: An Introduction 1 Ralf Dewenter and Justus Haucap 1.1 Introduction to the Introduction 2 1.2 Access to Networks: Concepts and Issues 4

1.2.1 Essential facilities 4 1.2.2 One-way access 6 1.2.3 Two-way access (interconnection) 7

1.3 Access Pricing: Theory 7 1.4 Access Pricing: Practice 9

1.4.1 The retail-minus approach 11 1.4.2 The efficient component pricing rule 11 1.4.3 Cost-based concepts 13 1.4.4 Capacity-based pricing and price caps 15 1.4.5 Institutions 16

1.5 Contents of this Book: Theory 18 1.5.1 One-way access pricing 18 1.5.2 Two-way access pricing 22 1.5.3 Access pricing and multihoming 24

1.6 Contents of this Book: Practice 26 1.6.1 Applications to specific markets 26 1.6.2 Policy 31

1.7 Conclusion 34 References 35

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VI Contents

PART I - ONE-WAY ACCESS PRICING 39

Chapter 2 Access Pricing and Infrastructure Investment 41

Joshua S. Gans 2.1 Introduction 42 2.2 Model of Investment Timing 43

2.2.1 Investment costs 44 2.2.2 Investment benefits 44 2.2.3 Socially optimal timing 45

2.3 No Access Regulation 46 2.3.1 Motives for access 46 2.3.2 Motives for investment 47 2.3.3 Negotiations over access 49 2.3.4 Equilibrium investment timing 50 2.3.5 Summary 52

2.4 Access Price Regulation 52 2.4.1 'Small' seekers 53 2.4.2 Two 'large' firms 54 2.4.3 Summary 58

2.5 Practical Issues 58 2.5.1 Optimal usage charges 58 2.5.2 Access holidays 60

2.6 Conclusion 62 References 63

Chapter 3 Network Financing with Two-Part and Single Tariffs 65

Axel Gautier 3.1 Introduction 66

3.1.1 Model overview and results 68 3.1.2 Related literature 70

3.2 Model 71 3.2.1 Demand, costs and information 71 3.2.2 Regulation 72

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Contents vii

3.2.3 Timing of the events 73 3.2.4 Benchmark: the regulated monopoly case 74

3.3 Optimal Access Charges 75 3.3.1 The entrant's entry and supply decisions 75 3.3.2 Two-part tariff 76 3.3.3 Single tariff 79

3.4 Comparisons 81 3.4.1 Market structure 81 3.4.2 Weifare 82

3.5 Concluding Remarks 83 Appendix 85

A3.1 Proof of proposition 3.2 85 A3.2 Proof of proposition 3.3 87 A3.3 Proof of proposition 3.4 88

References 89

Chapter 4 Unbundling the Local Loop: One-way Access and Imperfect Competition 91

Paul W. J. de Bijl and Martin Peitz 4.1 Introduction 92 4.2 Policy on Local-Loop Unbundling in Telecoms 95

4.2.1 Unbundling in the EU 95 4.2.2 Unbundling in the US 97

4.3 Regulatory Theory with Füll Participation 99 4.4 Regulatory Theory with Partial Participation 107 4.5 Discussion and Conclusion 114 References 116

PART II - TWO-WAY ACCESS PRICING 119

Chapter 5 On the Role of Access Charges Under Network Competition 121

Stefan Buehler and Armin Schmutzler 5.1 Introduction 121 5.2 Linear Retail Prices 124

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viii Contents

5.2.1 Assumptions 124 5.2.2 Comparative statics 128 5.2.3 Are retail prices Strategie complements? 130 5.2.4 Do higher access charges shift out the reac-

tion curves? 132 5.3 Simplifying Assumptions: How do they Affect the

Role of Access Charges? 133 5.3.1 Full-coverage networks 134 5.3.2 Full-coverage networks and balanced

calling pattern 136 5.4 Nonlinear Retail Tariffs 138

5.4.1 Assumptions 139 5.4.2 Comparative statics 141

5.5 Extensions and Conclusions 145 References 146

Chapter 6 Access Pricing Under Cost Asymmetry in Telecommunications 149

Viktoria Kocsis 6.1 Introduction 150 6.2 Model for Linear Tariffs 153

6.2.1 Cost strueture and access fee 153 6.2.2 Demand strueture and consumer

surplus 154 6.2.3 Price competition 157 6.2.4 Comparison and policy implications 158

6.3 Competition in Two-Part Tariffs 160 6.3.1 Demand strueture and consumer

surplus 161 6.3.2 Price competition 162 6.3.3 Comparison and policy implications 164

6.4 Conclusions 167 Appendix 168 A6.1 Proofs 168 A6.2 Simulation results 172

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Contents ix

A6.2.1 Comparison according to parameter values 172 A6.2.2 Comparison according to access fee 173

References 175

PART III - Access Pricing and Multihoming 177

Chapter 7 Interconnection Competition with Multiple Network Subscription 179

Roger K. Alexander 7.1 Introduction 180

7.1.1 Background to new analysis framework 180 7.1.2 Organization of this chapter 182

7.2 Consumer Utility Model Setup 183 7.2.1 Consumer discrete subscription choice model . . .184 7.2.2 Direct measurable Utility from network

subscription 193 7.3 Network Competition - Dual Network Subscriptions 199

7.3.1 Network marginal costs and price competi­tion model 199

7.3.2 Network calling pattern 200 7.3.3 Two-stage network competition 201

7.4 Network Competition Modelling: Linear Pricing 209 7.4.1 Equilibrium price-access Charge relationship . . . .209

7.5 Conclusion 216 7.5.1 Summary and general findings 216 7.5.2 Future areas of study 218

Appendix 218 A7.1 Dual network subscription example 218

References 227

Chapter 8 Platform Competition with Endogenous Multihoming 229

Roberto Roson 8.1 Introduction 229 8.2 The Model Structure 233

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X Contents

8.2.1 Assumptions and definitions 233 8.2.2 Profit maximization 238

8.3 A Numerical Simulation of Platform Competition 242

8.4 Concluding remarks 246 References 247

PART IV - Application to Specific Markets 249

Chapter 9 Network Ownership and Optimal Tariffs for natural Gas Transport 251

Kare P. Hagen, Hans Jarle Kind and Jan Gaute Sannarnes 9.1 Introduction 251 9.2 A Simplified Model for Transportation of Gas 255

9.2.1 Fully integrated network 256 9.2.2 Separation of ownership between

transportation network and extraction and marketing activities 265

9.3 Conclusion and Discussion 270 Appendix 272 A9.1 Existence of equilibrium 272 A9.2 Downstream competition with firms located outside

the country 274 References 275

Chapter 10 Mobile Termination 277 Harley Thompson, Olivier Renard and Julian Wright 10.1 Introduction 277 10.2 Literature Review 280 10.3 Theoretical Model 285

10.3.1 Model derivation 285 10.3.2 Model Solution 290

10.4 Model Calibration 292 10.4.1 Colombian fixed-to-mobile arrangements 292 10.4.2 Calibration methodology 293 10.4.3 Data for Colombia 293

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Contents xi

10.5 Weifare Analysis 294 10.6 Conclusions and Future Directions 299 References 301

Chapter 11 Incentives to License Virtual Mobile Network Operators (MVNOs) 303

Ralf Dewenter and Justus Haucap 11.1 Introduction 303 11.2 What are MVNOs? 306 11.3 Regulatory Approaches and Emergence

of MVNOs 309 11.4 The Model 313

11.4.1 Cournot competition 313 11.4.2 Bertrand competition 316 11.4.3 Stackeiberg competition 320

11.5 Summary and Policy Conclusions 322 References 323

PART V - Policy 325

Chapter 12 Antitrust and Sector-Specific Regulation in the European Union: The Case of Electronic Communications 327

Alexandre De Streel 12.1 Introduction 328 12.2 A Broad Picture 329

12.2.1 Substantive law 329 12.2.2 Institutional design 335

12.3 Competition Law 339 12.3.1 Ex post competition law 339 12.3.2 Ex ante competition law: mergers and Joint

ventures 345 12.3.3 Appraisal of the application of antitrust in

the electronic Communications sector 348

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Xll Contents

12.4 Sector Regulation 350 12.4.1 Ex ante sector regulation 350 12.4.2 Appraisal of the application of sector

regulation 353 12.5 Optimal Balance between Rules and Coordination

between Institutions 358 12.5.1 The pptimal balance between antitrust and

sector regulation 358 12.5.2 The optimal institutional coordination 362

12.6 Conclusion 363 Appendix 365 References 368

Chapter 13 Efficient Regulation of Dynamic Telecommunications Markets and the New Regulatory Framework in Europe 373

Pio Baake, Ulrich Kamecke and Christian Wey 13.1 Introduction: The New Regulatory Framework in the

European Union 374 13.2 Dynamic Competition 379

13.2.1 Schumpeter' s competition through innovation 380

13.2.2 Incentives to innovation 387 13.2.3 The role of competition 391 13.2.4 Intermediate conclusion 394

13.3 Dynamic Competition in Telecommunications Markets and Traditional Regulation 395 13.3.1 New networks: structures and demand for

DSL accesses 396 13.3.2 Investment, downstream markets and

strategies for the network Operator 397 13.3.3 Competition to construct new networks 402 13.3.4 Traditional regulation: cost-based network

access 406

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Contents xiii

13.4 Regulation of New Markets 407 13.4.1 New markets 408 13.4.2 Regulation 411 13.4.3 Incentive effects: infrastructure-based

competition 414 13.5 Summary 417 References 418

Chapter 14 Are Vertically Integrated DSL Providers Squeezing Unaffiliated ISPs (And Should We Care)? 421

Robert W. Crandall and Hai J. Singer 14.1 Introduction 422 14.2 The Role of Regulation in Promoting ISPs 424

14.2.1 Computer I and II decisions 425 14.2.2 Choice of global service provider regulation . . . .427 14.2.3 Reciprocal compensation game 428

14.3 What Did Internet Service Contribute to Economic Value? 430 14.3.1 The value-added of unaffiliated internet

service Providers in the dial-up era 430 14.3.2 The value-added of intermediaries in the

broadband era 432 14.4 Issues for Competition Law 440

14.4.1 Price squeeze allegations 442 14.4.2 The conditions under which a price squeeze

harms consumers 445 14.4.3 The relationship between a price squeeze

and cross subsidy 450 14.5 Conclusion 455 References 456

Index 461