The Arbitrage between Service and Infrastructure Competition in the Light of the "Ladder of Investment" Theory (original) (raw)

The first part presents the main economic mechanisms related to the alternative "infrastructure/service", the theoretical basis on which these mechanisms rely and the related regulatory schemes. M.A.Bergman discusses the trade-offs between competition in the entire value chain that comes from infrastructure-based competition and the economies of scale from access-based competition, as well as how balance is affected by the choice of a specific regulatory model. He demonstrates that while Infrastructure-based competition potentially offers less regulationinduced inefficiencies, service-based competition allows the industry to realize greater returns to scale (including network effects). He reviews a number of regulatory options, such as vertical separation, government ownership and access regulation, and analyses their implications in terms of desirability of competition on infrastructure. A.Henten and K.E.Skouby discuss the theory of 'the ladder of investment' in broadband access. This theory states that the entry of players on the market occurs on a step-by-step basis ('rung-wise'). Players enter the market in areas where barriers to entry are low and, later in the process, enter areas with higher barriers. A frame-setting discussion on both the theory and the environment in which it has developed is proposed, highlighted via three country cases (the UK, the US, and Denmark) and emphasises how these countries approached the facility-based vs. servicebased competition issue. J.Kittl, M.Lundborg and E.O.Ruhle propose a panorama of the implementation of unbundling by National Regulatory Agencies across Europe and the related impact in terms of economic welfare. This study points out the importance of a balanced approach: it seems that there is no single way towards competition, but that markets need a healthy mixture of both service-based and infrastructure-based competition. They also show that, with convergence and new technologies like broadband and VoIP, access at the levels of networks, services, applications and devices and own infrastructure and thus LLU will become increasingly important for operators to be able to differentiate their products. U.Blum, N.Krap and C.Growitsch starting point is the announcement, in summer 2005, of Deutsche Telekom to precondition a 3 billion euro investment in a fibre optic network not to be regulated with respect to pricing and third party access. Unless the new technologically-leading infrastructure was exempted from regulation, Telekom threatened the investment to be made in other areas or countries. On that basis, to develop a regulator's strategy that allows investments to occur but prevents monopolistic prices, the authors model an investor's decision problem under threat of regulation and show that the mere threat of a regulator's intervention may prevent Infrastructure versus Service-based Competition: the Case of Mobile Telecommunications-11-responsive to changes in consumer preferences and led to continual improvement in service quality. L.Benzoni and P.Geoffron propose a comparative analysis of structures (in terms of number of operators) and performances (price, volume, penetration) in the European mobile markets in order to reveal an "optimal structure". It has been shown that markets with three players are those that have the most success in relation to these criteria (or, at least, that markets with four and five operators does not present obvious advantages for consumers). Without concluding that three is a "golden number", these results suggest to authorities that there is not necessarily an economic rationale to add more operators (MNOs as well as MVNOs) that will have to face the persistent first movers advantages of the incumbents. It also indicates that granting an additional license does not lead, in any circumstance, to an increase in the consumers' surplus. C.H.Vuong discusses the reasoning favouring infrastructure over servicebased competition in the context of the European mobile telephony sector. Using principally basic economics and finance toolkits, the author argues that, because of the characteristics of mobile industry (a fast changing industry with high initial irreversible investments) and the complex nature of competition in the European mobile industry, infrastructure-based competition presents more "guarantees" as regards innovation dynamics over the long term. He shows that there is no need to intervene in relationships between MNOs and MVNOs and credible regulatory threats should be sufficient for optimal market outcome, and avoid regulatory costs.