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Is two enough? Analysis of a possible scenario

Is two enough? Analysis of a possible scenario. The Future of Telecoms Regulation 2006 Robert Stil, Head of Economic Analysis Team. Market developments in NL. The market moves towards bundled multi-play offers supplied by DSL and cable operators

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Is two enough? Analysis of a possible scenario

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  1. Is two enough?Analysis of a possible scenario The Future of Telecoms Regulation 2006 Robert Stil, Head of Economic Analysis Team

  2. Market developments in NL • The market moves towards bundled multi-play offers supplied by DSL and cable operators • Cable operators successful in VoB, KPN introduces lP TV at large scale • KPN rolling out fibre optic all-IP network to the street cabinets, thereby making MDF locations obsolete • Consolidation of cable companies. #1 and #2 control > 90% of connections • KPN is acquiring ISPs and independent DSL operators

  3. What is the likely scenario? • A new monopoly, a wide oligopoly, a tight oligopoly, …..? • Possible scenario: A duopoly of vertically integrated operators offering (substitutable) multi-play bundles • Research question: Can a duopoly of KPN and a cable company be effectively competitive in the absence of regulation?

  4. Competition in oligopolies • Non-competitive outcomes as a result of normal profit maximisation • Degree of competition depends on • Price (+) v.s. quantity competition (-) (= Bertrand v.s. Cournot) • Number of firms (+) • Level of product differentiation, switching costs, barriers to entry (-) • Countervailing buying power (+), bidding markets (+) • NRF threshold for intervention is a dominant position. Non competitive oligopoly is currently not captured under single dominance (monopoly) or joint dominance (tacit collusion).

  5. Collusion in oligopoly • Tacit collusion: behaviour aimed at reaching an implicit cooperative agreement • Market circumstances that enable tacit collusion • Few firms, high entry barriers, frequent interaction (+) • Market stability, transparency, symmetry (++) • Countervailing buying power, network effects (-) • Structural links, multi market contact (+) • In the NRF tacit collusion is captured under the concept of joint dominance

  6. What drives competition in broadband? • Europe: • ERG statement: regulated intra-platform competition drives inter-platform competition • Most competitive countries have cable platforms supplying broadband next to (regulated) DSL • US: • Natural experiment in the US (deregulation of DSL line sharing) • increased penetration speed DSL vs. Cable • prices DSL dropped more than Cable prices • “Technology has replaced regulation as the main driver of competitive threat to the Bells.”

  7. What is the most relevant model of oligopolistic competition? • Probably players set capacity first and then compete on prices -> some form of capacity constraint • Products are differentiated to a certain extent - > no perfect substitutes • Customers are locked in to a certain extent and face switching costs -> some level of demand inelasticity • Therefore: No pure Bertrand type of competition. Cournot type more likely

  8. Results of the analysis (1) • Likelihood of collusion = ambiguous • Essential criteria for collusion are met- Few firms, - high entry barriers, - frequent interaction • But: - market is highly dynamic, products are differentiated (-)- interoperability regulation neutralises network externalities (+)

  9. Results of the analysis (2) • Likelihood of a effective competition in the duopoly • No pure price competition. • Product differentiation • Switching costs • Low potential entry • No countervailing buying power • Significant risk that competition is not effective > prices above long-run average costs, but lower than monopoly.

  10. Hypothesis If the electronic communications market in The Netherlands develops into a duopoly of cable and DSL, effective competition will not be a likely outcome, and the current regulatory framework is not able to deal with this situation.

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