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Quantitative Analysis of Wholesale Market Regulation

Quantitative Analysis of Wholesale Market Regulation. Agenda. Introduction to Wholesale Market Regulation. ILEC / CLEC Regulated price caps Why we need regulation?. Project Objective. Analyze the behavior variation of ILECs and CLECs with changes in price cap.

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Quantitative Analysis of Wholesale Market Regulation

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  1. Quantitative Analysis of Wholesale Market Regulation

  2. Agenda

  3. Introduction to Wholesale Market Regulation • ILEC / CLEC • Regulated price caps • Why we need regulation?

  4. Project Objective • Analyze the behavior variation of ILECs and CLECs with changes in price cap

  5. Modeling Wholesale Regulation REGULATORY ACTION Costs (supply) Wholesale price caps WHOLESALE REG MODEL Willingness to pay (demand) Consumer Surplus Profits (price, quantities)

  6. Modeling Demand Standard Deviation for service 1 and service 2 Mean for service 1 and 2 DEMANDMODEL Number of users Maximum Willingness to pay Correlation coefficient between service 1 and service 2 Price for service 1 and service 2 Number of users that choose service 1 and number of users that choose service 2 and consumer surplus Normal distribution is used to model the willingness to pay Users choose the services to maximize his surplus Assumption: Users choose service 2 if the surplus obtained is the same

  7. Modeling Cost COST MODEL Number of users that choose service 2 Number of users that choose service 1 Retail cost for service 1 and service 2 Wholesale cost for service 1 and service 2 Total Cost = Number of users for a serviceα, 0<= α<= 1 Retail Cost = Total Cost * β, 0<= β <= 1 Wholesale Cost = (1 – β) * Total Cost

  8. Modeling Profits Demand Model PROFIT MODEL Price caps for service 1 and service 2 Number of users Cost Model Profit for ILEC and Profit for CLEC If (pw < cw) then CLEC chooses to buy wholesale service from ILEC Else CLEC will build his infrastructure Assumption: If ILEC and CLEC offer the same price, the consumers choose CLEC over ILEC

  9. Simulation Data • Input data used: • Mean 1 = 5 • Mean 2 = 5 • Standard Deviation 1 = 1 • Standard Deviation 2 = 1 • Max willingness to pay 1 = 10 • Max willingness to pay 2 = 10 • Number of users = 50

  10. Simulation I • No costs to ILEC • Correlation coefficient = -0.5 • Simulation is done for different price caps for the two services

  11. Results ILEC Profit CLEC Profit Price cap service 1 = 0, Price cap service 2 = 0

  12. Results ILEC Profit CLEC Profit Price cap service 1 = 5, Price cap service 2 = 5

  13. Results ILEC Profit CLEC Profit Price cap service 1 = 0, Price cap service 2 = 5

  14. Simulation II • Positive correlation between services and using the previous data • Correlation Coefficient = +0.5 • Simulation is done for different price caps for the two services

  15. Results

  16. Simulation III • Same costs to ILEC and CLEC • Correlation coefficient = -0.5 • Simulation is done for different price caps for the two services

  17. Results

  18. Simulation IV • 90% of CLEC cost to ILEC • Correlation Coefficient = -0.5 • Simulation is done for different price caps for the two services

  19. Results

  20. Simulation Analysis

  21. Future work • Using the model to represent segmented Regulation • Using more than 2 services

  22. Thank You

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