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Thoughts on Broadband Competition and Product Bundles

Thoughts on Broadband Competition and Product Bundles. Judith Chevalier. Massive Literature on Tying/Bundling. Various motives for tying/bundling Price discrimination Exclusion Product differentiation Rent extraction of value created by a complement

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Thoughts on Broadband Competition and Product Bundles

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  1. Thoughts on Broadband Competition and Product Bundles Judith Chevalier

  2. Massive Literature on Tying/Bundling • Various motives for tying/bundling • Price discrimination • Exclusion • Product differentiation • Rent extraction of value created by a complement • Tying and/or bundling can be pro-consumer and pro-welfare

  3. Mapping market into models • 1 or 2 providers of Internet access • Competitive providers/substitutes for phone service. • VOIP services/mobile. • 1 or 2 providers of TV services, substitutes for TV services, but not every customer demands TV services. • All items are either independent or complements– synergies in co-production.

  4. Ex:1-Way Essential Complements • Chen and Nalebuff (2009) • Two goods, A is essential and B is dependent • Consumers can enjoy A without B, but can enjoy B only if they buy A. • Example: • Cable Modem Service and IP telephony

  5. Background Intuition: 1WEC • Simple Case, A and B from different firms • All consumers value A at 1 and B at 0.1 • Assume zero cost to produce either A or B Result: division of pie is indeterminate • Any pair of prices that add up to 1.1 with Pb ≤ 0.1 is a Nash Equilibrium. • Case 2, Add heterogeneity to A consumers • Value of A is uniform on [0, 1] and value of B is 0.1 Result: a unique Nash Equilibrium • A charges 1/2, B charges 0.1 Note that B gets all the value it creates • This is true for all values for B up to 1/2

  6. 1 1 1 A&B A&B A&B Pa 0 0 0 λ λ λ Pb Pb Pb Basic Setting: 1WEC Indep. Goods → 1WEC → Fixed Prop. A A Va B Vb

  7. In this model • Monopolist would capture all of the rents through the “essential” product. • Monopolist has incentive to charge low price for B good, driving out rival B’s. (But in this model, consumers don’t mind).

  8. Gaps between model and reality • Can get phone service w/o Internet from ILEC. • Differentiated duopoly not monopoly • If products are differentiated, it is possible for a higher quality competitor good to be driven out by a lower quality good sold by the A incumbent. • Modeled a double play, not a triple play.

  9. What data would we need to look at these issues? • Ideally, P&Q for all bundles. • Maybe AR for customers who take 1,2,3 products. Some questions: • Given the prices charged for bundles and non-bundles, how much would consumers have to value competing VOIP service to buy it? • What customer types effectively face a monopoly? • Want phone but not internet, want internet but not phone, etc.

  10. Lines in US 46% residential 2% business Revenues in Canada 55% residential 20% business Suggestive statistics-cable share of broadband access

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