Platform regulation in other industries: Lessons from telecoms Tommaso Valletti Imperial College London, Telecom ParisTech and CEPR TOMMASO VALLETTI
Jan 08, 2016
Platform regulation in other industries:
Lessons from telecomsTommaso Valletti
Imperial College London, Telecom ParisTech and CEPRTOMMASO VALLETTI
Invisible prices (to us)
Interconnection between telecommunications networks
Call termination is one of the most important interconnection services
Interconnection prices are “invisible” to us, but affect competition and, ultimately, the tariffs we pay
TOMMASO VALLETTI
Very interesting findings
Competitive “bottlenecks”
Some prices are “monopolised”
“Two-sided” markets (platforms) and skewed pricing structures
Policy question: intervene to achieve efficiency (regulation vs. competition policy)
General features of 2SM
Relative prices versus rents General problem that applies to many
situations Two ways of looking at this problem:
– Even under perfect competition, a 2SM carries inefficiencies
– Intervention typical of 1SM does not work in 2SM
TOMMASO VALLETTI
Fallacies in 2SM
(LR)IC = efficient?
Individual mark-ups indicate market power?
More competition implies a more balanced price structure?
Removal of cross-subsidies will benefit the side that pays above (LR)IC?
TOMMASO VALLETTI
The “waterbed” effectMobile telephony largely unregulated, with the
important exception of Mobile Termination Rates (MTR)
Mobile customers bring a “termination rent”Competition for customers might exhaust this rentJustification for regulatory intervention to cut MTR
-> BUT this can potentially increase prices for mobile subscribers
This is the “waterbed” effect! (“Seesaw” in the US)
TOMMASO VALLETTI
Genakos and Valletti (JEEA, 2011)
Is there a waterbed effect?–MTR down -> retail prices up?
Is it “full”?–Sector fully competitive, so just a rebalancing of structure of prices?–Or market power, so negative impact on operators’ profits?
Empirical strategy–Exploit differential regulation between countries and, within countries, between operators
TOMMASO VALLETTI
Average Price Around the Introduction of Regulation
TOMMASO VALLETTI
Evolution of the waterbed effect (post-paid)
TOMMASO VALLETTI
Evolution of the waterbed effect (pre-paid)
TOMMASO VALLETTI
Main results, and why do we care
Waterbed effect strong and significant (-10% in MTR -> +5% in bill)
Effect diluted for pre-paid consumers, where regulation counteracts the “collusive” effect of access charges
Magnitude of the waterbed effect key to assess costs and benefits of regulation of termination charges (externalities and elasticities)
Implications for the current regulation of “roaming charges” within EU
Regulating “only” one price: Payment Protection Insurance (UK CC)TOMMASO VALLETTI
Static - What about investments
Another hot topic is “net neutrality”
Concern: technology allows Internet Service Providers (ISPs) to discriminate between data packets quite easily
Regulate the internet to preserve openness and neutrality?
Leave the internet free to develop according to market forces?
TOMMASO VALLETTI
Net neutrality
(Non-academic) debate can be summarised as follows:– CEO of AT&T (ISP): “Now what they would like to do is use my pipes
free, but I ain't going to let them do that. We have spent this capital and we have to have a return on it”
– Google (CP) affidavit to FCC: “The Internet is awesome, let’s keep it that way!”
Economic models to analyze the tension between content innovation and network expansion to avoid congestion: edge vs. core
Key is to understand elasticities of supply of “content” versus “capacity”TOMMASO VALLETTI