Network Interconnection in Telecommunications Telecommunications Service and Policy The Economic Journal, 108 (May), 545~564 Mark rmstrong presented by Group 3 Jongwon Choi, Kyounglee Park
X. Table of Contents 0. Introduction 1. Model of Competing Networks 2. Symmetric Model Without Regulation 3. n symmetric Model with Regulation 4. Conclusion 2
0. Introduction Network telecommunication, gas, electricity, rail, air transport, etc competition desirable in some sector, other sectors remain monopolized firms in competitive sector require access to the monopolized sectors ccess Model M F2 F1 M2 M1 M3 One-way ccess gas supply electricity rail services long-distance telecoms Two-way ccess Without competition : International telecom With competition : network competition in local telecoms main interest of this paper 3
0. Introduction Overview / Spoiler this paper analyzes the choice of access charges in the two-way access framework when there is competition for customers 1. present a simple model for a telecom market with 2 firms competing for subscribers 2. in symmetric and unregulated market (i.e. Mature phase), firms can agree over the mutual, but not socially optimal, access charges 3. In asymmetric market where there are one dominant firm and one entrant (i.e. early stage), 2 firms cannot agree on a common access price, and regulatory intervention is needed 4
1. Model of Competing Network Network Model firm's utility : U firm's utility : U Firm x0,1 : degree of preference Firm # of customers : S S ( S S 1) Consumer s utility : U x) U x) Price : P P # of customers : S 1 U U 2 2 # of customers depends on the utility difference User s quantity of calls : Consumer s surplus : Total calls originating from : v i q i q( p ) v( p ), v( p) q( p) i i s q Quantity of calls and CS is a function of price 5
1. Model of Competing Network Network Model subscriber calling patterns : any given subscriber is equally likely to call any other subscriber, regardless of the network that other subscriber is on net number of calls from to, z z( p, p ) s(1 s)( q q ) retail price consumers net outflow of calls need for access typical behavior for the function z q( p) 2 p 1 2 ui v( pi ) (2 pi ) 2 1, p 1(fixed), p varies < s Net Demand for ccess> 6
1. Model of Competing Network Notations F c c O c T Firm c O c T Firm c O c T F c F c Call origination cost : c T c O O ci Fixed cost : F c i F c Call termination cost : T ci ccess charge : ti Total Profit for Network O T F T sq { p c [ s c (1 s) t ]} s c s(1 s) q ( t c ) profit = s call x (price total cost) - fixed cost + access profit from ( p) q( p c c ) c O T F i i i i Per unit profit function per customer in retail section 7
1. Model of Competing Network Notations profit equation can be re-formulated as : T T s s(1 s)[ q ( t c ) q ( t c )] Profit = profit in retail section + profit from buying/selling access t t t T s z ( t c ) when access charges are equal (or reciprocal) : price selection move order : 1. access charges t chosen first 2. firms choose their retail prices accordingly 8
2. Symmetric Model Without Regulation ssumptions network symmetric t t t, c c c, c c c, c c c O O O T T T F F F Selecting Profit-maximizing Price * p ssuming is single-peaked and is a unique maximand, ( p, p) sz 0 T ( s ) / p p t = c + z / p * ( p ) 0 Direct cost of supplying access to Opportunity cost to in supplying the marginal unit of net access to In unregulated two-way setting, the formula relating retail prices to access charges is efficient component pricing rule ECPR 9
2. Symmetric Model Without Regulation Selecting Profit-maximizing Price * Using the facts that ( p ) 0 and by symmetry,, * * T qp ( ) * t c 4 s(0) ( p ) * q( p ) 1 2 3 s(0) * t, the candidate for profit max. access charge, is high when 1. measure of substitutability is high (two firms are very substitutable) 2. inelastic demand (amount of calls insensitive to price change) 3. max. profit per subscriber is high when the access charge is set as above, firms have no incentive to deviate from collusive price p* 1 2 If one firm changes price slightly, the gain in profit from increased market share is offset by the increased access payments 10
2. Symmetric Model Without Regulation Note 1 : substitutability vs. collusion Proposition 1 : Collusion cannot be sustained if α, the degree of substitutability, is sufficiently small if services differentiated, high access charge is used for collusion in one-way model, high access charge is used for anti-competitive effect same result as in two-way, but for different reason <Profit when α=2> Not substitutable <Profit when α=1> <Profit when α=0.5> Very substitutable 11
2. Symmetric Model Without Regulation Note 2 : Welfare Maximizing ccess Charge ** p is the welfare maximizing access charge when ** ( p ) 0 t ** T c 2 q p ** ( p ) ** ( ) ( p, p) T ( sz) / p 0 t c p z / p charge is below the cost of providing access to overcome the price/cost markup in the retail market Quote : For existence of Market Power, a sub-ecpr C < c is ideal (as a subsidy) - Team 1 12
3. n symmetric Model with Regulation ssumptions : dominant, regulated firm, : unregulated, s(0) 1 p fixed (if s price same as, captures no subscribers) ( p ) 0 (entrant has a positive margin in supplying it s service) reciprocal access charge t 13
3. n symmetric Model with Regulation s Profit chooses p to maximize it s own profit ( t) max : s ( t c ) z ( p, p ) T p0 convex in t, and satisfies ( t) z[ p, p ] 0 is decreasing in t, prefers lower common access charges In part 2, both firms wanted high access price Optimal Common ccess Charge Given s Retail Price define sum of consumer surplus (CS) as V( p ), V( p ) Q ( p, p ), Q (1 s) q Total Welfare = CS + Industry Profit T T = V + s s z( c c) Total demand For s service Consumer s surplus Firm and s profit Net profit from Interconnection 14
3. n symmetric Model with Regulation Optimal Common ccess Charge Given s Retail Price (cont d) T T V + s s z( c c) optimal p maximizes the expression above first order condition relating p to t 0 p (total welfare) p 0 putting these two expressions together, welfare-maximizing access charge : t ** T s / p Q c + / / z p z p Direct cost of providing service # subscriber loses in supplying with z Subsidy on access paid to to overcome its market power The first two terms are a natural interpretation of ECPR formula 15
3. n symmetric Model with Regulation Note : Optimal Common ccess Price for One-way Setting (ppendix 1) t ** T s / p Q c + ˆ / ˆ / Price z p z p p Elasticity formally identical to that in the two-way setting (gross demand for access, instead of net demand) if the entrant faces a very elastic demand curve, the last term is small market power is not so influential 16
4. Conclusion Questions to nswer Can firms agree on the Level of ccess Charge? Yes, if not substitutable Regulator s Role? should play at least a monitoring role, the access price may be far from socially desirable ccess Price when there is a dominant, incumbent firm? both firms cannot agree on a common access price, welfare-max access price derived 17
4. Conclusion Thank You For Your ttention (or patience), ny Questions? 18