Duarte Brito Pedro Pereira João Vareda Can Two-Part Tariffs Promote Efficient Investment in NGN?

Duarte BritoPedro PereiraJoão Vareda

Can Two-Part Tariffs

Promote Efficient

Investment in NGN?

2Next Generation Network

telecommunications network

packet-switched

optical fiber-to-the-home

3Regulatory Policy

trade-off

static and dynamic efficiency

4Linear Tariffs

trade-off may generate

dynamic inconsistency

5Dynamic Consistency

Before Investment: promise high access price

After Investment: zero access price socially optimal

6Commitment by Regulator

can commit for short periods

investment cycle very long

7Theme

Can Two-Part Tariffs

solve Dynamic Inconsistency?

8Fixed Part

welfare neutral

reward investment

9Plan

(1) Model

(2) Comparing the Two Cases

(3) Mexico

(4) Conclusion

10 Part 1 of 4

Model

11Firms

1 vertically integrated incumbent

1 retail entrant

needs access incumbent’s network

retail products differentiated (Hotelling)

12Technology

incumbent´s investment ↑ quality

old network phased-out after investment

13Pricing

two-part tariffs: retail and wholesale

only wholesale market regulated

14Timing: Commitment Game

(1) regulator sets all access tariffs

(2) incumbent decides if invests

(3) entrant decides if exits

(4) retail competition

15Timing: No-Commitment Game

(1) regulator sets access tariff to old

(2) incumbent decides if invests

(3) regulator sets access tariff to new

(4) entrant decides if exits

(5) retail competition

16

Part 2 of 4

Comparisonof the two Cases

17Investment Cost Low

games have same equilibrium

however…

entrant´s contribution very large

18Investment Cost Low

access tarifffixed part covers investment

linear part=marginal cost

incumbent invests

entrant stays

19Investment Cost High

games have different equilibria

two-part tariffs of no avail

20Regulatory Moratorium

with commitment

for intermediate costs

21

Part 3 of 4

Mexico

22Background

was claimed Mexico needs

new backbone network

23Identical Problems

problem investment new backbone network

identical

problem investment newlocal access network

24Interpretation

regulatory policy

induce incumbent to invest

backbone network

25 Part 4 of 4

Conclusions

26Conclusions

(1) can TPT promote efficient investment?

(2) if cost low, yes; if cost high, no

(3) but entrant’s contribution very large