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Platform regulation in other industries: Lessons from telecoms

Platform regulation in other industries: Lessons from telecoms. Invisible prices (to us). Interconnection between telecommunications networks Call termination is one of the most important interconnection services

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Platform regulation in other industries: Lessons from telecoms

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  1. Platform regulation in other industries:Lessons from telecoms TOMMASO VALLETTI

  2. Invisible prices (to us) • Interconnection between telecommunications networks • Call termination is one of the most important interconnection services • Interconnection prices are “invisible” to us, but affect competition and, ultimately, the tariffs we pay TOMMASO VALLETTI

  3. Very interesting findings Competitive “bottlenecks” Some prices are “monopolised” “Two-sided” markets (platforms) and skewed pricing structures Policy question: intervene to achieve efficiency (regulation vs. competition policy)

  4. General features of 2SM • Relative prices versus rents • General problem that applies to many situations • Two ways of looking at this problem: • Even under perfect competition, a 2SM carries inefficiencies • Intervention typical of 1SM does not work in 2SM TOMMASO VALLETTI

  5. Fallacies in 2SM • (LR)IC = efficient? • Individual mark-ups indicate market power? • More competition implies a more balanced price structure? • Removal of cross-subsidies will benefit the side that pays above (LR)IC? TOMMASO VALLETTI

  6. The “waterbed” effect • Mobile telephony largely unregulated, with the important exception of Mobile Termination Rates (MTR) • Mobile customers bring a “termination rent” • Competition for customers might exhaust this rent • Justification for regulatory intervention to cut MTR -> BUT this can potentially increase prices for mobile subscribers • This is the “waterbed” effect! (“Seesaw” in the US) TOMMASO VALLETTI

  7. Genakos and Valletti (JEEA, 2011) Is there a waterbed effect? MTR down -> retail prices up? Is it “full”? Sector fully competitive, so just a rebalancing of structure of prices? Or market power, so negative impact on operators’ profits? Empirical strategy Exploit differential regulation between countries and, within countries, between operators TOMMASO VALLETTI

  8. Average Price Around the Introduction of Regulation TOMMASO VALLETTI

  9. Evolution of the waterbed effect (post-paid) TOMMASO VALLETTI

  10. Evolution of the waterbed effect (pre-paid) TOMMASO VALLETTI

  11. Main results, and why do we care • Waterbed effect strong and significant (-10% in MTR -> +5% in bill) • Effect diluted for pre-paid consumers, where regulation counteracts the “collusive” effect of access charges • Magnitude of the waterbed effect key to assess costs and benefits of regulation of termination charges (externalities and elasticities) • Implications for the current regulation of “roaming charges” within EU • Regulating “only” one price: Payment Protection Insurance (UK CC) TOMMASO VALLETTI

  12. Static - What about investments • Another hot topic is “net neutrality” • Concern: technology allows Internet Service Providers (ISPs) to discriminate between data packets quite easily • Regulate the internet to preserve openness and neutrality? • Leave the internet free to develop according to market forces? TOMMASO VALLETTI

  13. Net neutrality • (Non-academic) debate can be summarised as follows: • CEO of AT&T (ISP): “Now what they would like to do is use my pipes free, but I ain't going to let them do that. We have spent this capital and we have to have a return on it” • Google (CP) affidavit to FCC: “The Internet is awesome, let’s keep it that way!” • Economic models to analyze the tension between content innovation and network expansion to avoid congestion: edge vs. core • Key is to understand elasticities of supply of “content” versus “capacity” TOMMASO VALLETTI

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