By Briglauer, Schwarz, and Zulehner (2009)

1. Is Fixed-Mobile Substitution strong enough to de-regulate Fixed Voice Telephony? Evidence from the Austrian Markets By Briglauer, Schwarz, and Zulehner (2009) Pavlos C. Symeou Institute for Communication Economicswww.ice.bwl.uni-muenchen.de Munich

2. Overview • The EC in its recent recommendation for relevant markets for ex ante regulation has excluded the markets of national and international calls carried through the fixed network for both residential and business customers. The grounds of the decision lie in various intramodal developments such as the importance of broadband and the existing regulation in the wholesale markets. • The authors argue that this decision lacks empirical support. Beyond that, the decision has neglected the magnitude of Fixed-to-Mobile Substitution (FMS) that might have developed. • The authors postulate that understanding the degree of competition between the two services through empirical studies can assist regulators in effective market definition.

3. Overview • The authors suggest an empirical analysis of cross-price elasticity of (residual) demand (ei) of candidate substitute products (fixed/mobile calls and fixed/mobile access) in order to assess whether the two products belong to the same market. • Whether the two products belong to the same market is concluded based on a comparison between (ei) and an estimate of critical demand elasticity (ec) of the hypothetical monopolist. • If ei>ec then a price increase will reduce overall profits and consequently the two products belong to the same market, and vice versa.

4. Overview • The authors econometrically estimate the demand function for both national calls and access for fixed telephony and utilise the estimated coefficients to derive the ei values. • ec is estimated according to the following formula: • where the authors assume: • constant marginal costs, • linear demand, • pick a 25% share of variable costs, and • 10% as price increase.

5. Empirical Findings • The results are hugely dependent on the assumptions for the ec and the correctness of the demand estimates. • Therefore, this method can only complement conventional HMT and other qualitative methods used in market definitions. • These should all be discussed in your discussion section.

6. Empirical Findings • There is no reference to the data sources • Your construction of “prices” (ARPU) might be distorted by other sources of revenues included in the revenues data from which you construct prices. • The instrumental variables (termination charges) are most likely to be correlated with the error term in contrast to the opposite arguments of the authors. This is because the error term includes structural factors such as the magnitude of competition in fixed and mobile telephony and asymmetric regulation of termination charges across different providers. • For example, the prices of fixed voice providers are very likely to be influenced by the services for fixed voice provided by Austrian cable operators. In mobile telephony, termination rates are likely to be influenced by the new and non-regulated entrant after 2003 and also the M&A between two mobile providers. You need to make sure that these factors do not correlate with your instruments or include them directly in the regression model. Otherwise, your coefficient estimates will be inefficient if not also biased. An indication of the inappropriateness of the instruments is the fact that the SE errors of the TSLS estimation have mainly decreased, whereas the conventional expectation is for the inverse (Baum, 2008). • You need to discuss the different tests you conducted to ensure the appropriateness • What do the D(1) and D(2) variables measure?

7. Empirical Findings • You need to discuss how these results relate to the Austrian market, given the recommendations of the EC. • There is extensive research on the FMS, both at the national level and international. How does this study differ from others in that we can’t use the findings from existing studies analysis in complementing our criteria on market definition? Moreover, the study is simply based on Austrian data and therefore, according to the authors, the paper’s findings can not be generalised. That is in contrast to previous empirical studies which have utilised multinational data to conduct their econometric analysis. • You assume a 10% SSNIP (significant non-transitory increase in prices) and a 75% fixed costs. If instead your assumption conformed with the FTC’s 5% SSNIP, and a 65 CPM none of your products would have been found to belong in the same market.

8. Empirical Findings • Do we have any statistics on the Austrian market for sole mobile users? • On page 7: In fact, there are existing studies which show that mobile and fixed telephony are complements for business customers Taubman and Vagliasindi (2005). • Should you have data for other countries, it would be very interesting to see how they decisions of the EC compare with empirical findings based on the suggested approach.