Competition, regulation, and investment in new communications ...

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2. Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust .... execution; (iii) uncertainty relating to technological progress; (iv).
Competition, regulation, and investment in new communications infrastructure Georg Götz Justus-Liebig-University Giessen 23rd European Regional International Telecommunications Society Conference Vienna, July 2012

Structure/plan of the talk • Disclaimer and disclosure statement! • State of the debate and some “stylized facts“ on Competition, Regulation, and Investment“ Investment “Competition, • Some theoretical results (including simple/obvious “truths”) • “Monopoly” Monopoly regulation, regulation penetration penetration, and investment • Access charges, the make-or-buy decision, and retail prices i • Investment risk and regulatory commitment • (Extended policy) Conclusions

Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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State of the debate • Carlo Cambini and Yanyan y Jiang: g Broadband investment and regulation: A literature review. TP, 2009 • “Evidence Evidence in empirical findings exhibits a certain disunity. The majority concludes that local loop unbundling based on forward-looking g cost methodology gy discourages g both ILECs and CLECs from investing in networks, so that the stepping-stone theory is possibly not supported by the data; other findings support the non-negative effect of access regulation on investment. However, apart from a few exceptions, the lack of reasonable time-series data weakens the robustness of empirical analysis.” (p. 571) Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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High-speed internet connections in OECD-countries OECD-broadband internet penetration, June 2011 Fibre/LAN

Cable

Per 100 inhabitan nts

Other technolog.

DSL

Source: OECD Broadband Portal (Dezember 2011)

Æ Switzerland among the leaders Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Facilities-based vs. service-based competition Evolution of broadband penetration in western European countries

Per 100 inhabitan nts

Countries with facilities-based competition Countries with service-based competition Switzerland Germany

Source: OECD Communications Outlook 2011 (Preliminary Version), European Broadband Cable, Eurostat

Æ Countries with facilities-based competition (cable homespassed > 75%) exhibit more dynamic markets Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Telecommunication investment in recent years Average yearly telecommunications investment western European countries 2003 -2006

US$ p per capita

2006 -2009

Source : OECD Communications Outlook 2011 (Preliminary Version), Table 3.6 (Public telecommunication investment in the OECD area), area) Eurostat

Æ Investments are “higher” in countries with facilities-based competition

Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Population per MDF in 2000 German “cities” pop/MDF (HvT) 50000 45000 40000 35000 30000 25000

pop/ mdf

20000 15000 10000

0

1 108 215 322 429 536 643 750 857 964 1071 1178 1285 1392 1499 1606 1713 1820 1927 2034 2141 2248 2355 2462 2569 2676 2783 2890 2997 3104 3211 3318 3425 3532 3639 3746 3853 3960 4067 4174 4281 4388

5000

„Cities“ in increasing order of population per MDF

Æ Population distributed rather unevenly across exchanges Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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„Obvious truths“ • Framework: incumbent “monopolist” with many regional markets of different size (MDFs) • Highest incentive to invest for an unregulated monopolist • Incumbent‘s ‘ decision to invest: Invest Ù ΠR(s) ( )≥f ⇒Schumpeter ⇒Open-access-debate (Chicago doctrine: „one monopoly profit“)

• Underinvestment from total welfare perspective • Consumer surplus effect • Remark: Subsidies? Strategic g behavior by y and windfall gains for firms/certain regions/ certain consumers? - Which governmental level should decide/pay? Political economy! Overinvestment in certain regions? Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Penetration and coverage as a function off price i cap p s ≈ pop/MDF

Penetration Y 40 Mio. Mio

1000 800

30 Mio.

600 20 Mio. 400 10 Mio.

200 10

20

30

40

50

p

10

20

30

40

50

p

• Penetration initially increases with decreasing prices. However, as the price cap becomes very low, penetration eventually decreases. decreases ⇒ Price decrease increases demand in covered regions p invests less and coverage g and number of p potential ⇒ Monopolists consumers decreases Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Facilities-based competition with uneven population distribution • Differentiated Bertrand model • unregulated or uniform-pricing rule for incumbent Population density s – s

D M 0

– s s sC Duopoly Monopoly

Regions

Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Welfare under facilities-based competition € (billions)

Regulated (inclusive cable)

WRW Unregulated geogr. uniform prices

⇒ Uniform prices as a regulatory safeguard? ⇒ Differences in welfare are small. ⇒ Even regulation by an omniscient and benevolent regulator cannot improve much on the unregulatedσ situation Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Facilities-based vs. service-based competition as a function of the access charge

Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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High access charges lead to low retail prices: Static and dynamic efficiency reconciled!

Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Legacy networks and regulatory commitment •

Legacy network and the incentive to invest in NGA

⇒ Arrow (1962) rather than Schumpeter: Monopolist‘s /incumbent‘s incentive diminished by replacement effect ⇒ Suggestions: Reduce access charges/rental rates for legacy network -



Bourreau, Marc, Cambini, Carlo and Dogan, Pinar, Access Pricing, Competition, and Incentives to Migrate from 'Old' to 'N ' T 'New' Technology h l (J (July l 28 28, 2011) 2011).

Regulatory commitment/credibility and investment i incentives ti -

“Expropriate” once, but you never “expropriate” twice?

Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Investment risk and regulatory commitment •

EC NGA-recommendation, September 2010



NRAs should estimate investment risk, risk inter alia, alia by taking into account the following factors of uncertainty: (i) uncertainty relating to retail and wholesale demand; (ii) uncertainty relating to the costs of deployment, civil engineering works and managerial execution; (iii) uncertainty relating to technological progress; (iv) uncertainty relating to market dynamics and the evolving competitive situation, such as the degree of infrastructure-based and/or cable competition; and (v) macroeconomic uncertainty. These factors may change over time, in particular due to the progressive increase of retail and wholesale demand met. NRAs should therefore review the situation at regular intervals and adjust the risk premium over time, considering variations in the above factors. Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Regulatory regimes, NGA investments, and consumer surplus •

Regimes: • risk premium (~LRIC) • risk sharing (~FDC) • cooperation p



Region A: E(CSCooperation) > E(CSFullyDistributedCost ) > E(CSLRIC)



Region g B: E(CS ( FD ) > E(CSL) > E(CSCO)



Region C: E(CSFD ) > E(CSCO) > E(CSL)

Ch i ti Bender: Christian B d How H to t provide id access to t nextt generation ti networks? t k ? Th The effect ff t off risk i k allocation ll ti on investment and cooperation incentives Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Conclusions • Armstrong/Sappington g pp g ((Regulation, g , Competition, p , and Liberalization, JEL 2006, p. 330): „In an economic paradise, where a regulator is omniscient, benevolent, and able to fulfill any promise he makes, competition cannot improve upon regulated monopoly.” ⇒ Strange image of an ‘economic paradise’ ⇒ Impression: p ess o Regulators egu ato s more oea afraid ado of regulating egu at g too little tt e rather than regulating too much! [Type I vs. Type II errors] • Investment is at issue ⇒ (Error) Costs of regulating too much are much higher than of regulating too little Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Conclusions • „The „ industryy is obviouslyy no longer g a natural monopoly p y and wherever there is effective competition—typically and most powerfully, between competing platforms—land-line telephony, cable and wireless— regulation of the historical variety is both unnecessary and likely to be anticompetitive” (Kahn 2007, p. 1). • Benefit of doubt: Safeguards are sufficient ⇒ Competition policy ex-post approach investment holidays holidays“ • Rather regulatory holidays than „investment

Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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Literature •

Coexistence of service- and facility-based competition: The relevance of access prices for "make-or-buy"-decisions, Christian Bender and Georg Götz, MAGKS Discussion Paper N 07 No. 07-2011, 2011 F February b 2011 2011.



How to provide access to next generation networks? The effect of risk allocation on investment and cooperation incentives, Christian Bender, MAGKS Discussion Paper No. 49 2011 Dezember 49-2011, D b 2011. 2011



Competition, Regulation, and Broadband Access to the Internet, Götz, G. (2011), ITSconference Budapest.



Effective Competition: Its Importance and Relevance for Network Industries, Christian Bender, Georg Götz & Benjamin Pakula in: Intereconomics, Vol.46 (1), Januar 2011.



Investition und Regulierung bei schnellen Internetzugängen. Ein Vergleich von Deutschland und der Schweiz. Georg Götz und Patrick Zenhäusern (Polynomics). Vergleichsanalyse im Auftrag von Glasfasernetz Schweiz. Dezember 2011.



Schnelles Internet und weiße Flecken? Die Rolle von Staat und Regulatoren, Christian Bender und Georg Götz in: Wirtschaftsdienst, Vol. 91 (1), Januar 2011, S. 42-48.



Die neuen Rahmenbedingungen für Investitionen in die Kommunikationsinfrastruktur. Nikolaus Forgó, g Georg g Götz und Gerald Otto ((5/2010)) in "medien und recht- Zeitschrift für Medien- und Kommunikationsrecht" Prof. Dr. Georg Götz - Chair for Industrial Organization, Regulation and Antitrust

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