Is two enough Analysis of a possible scenario

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Is two enough?Analysis of a possible scenario

• The Future of Telecoms Regulation 2006
• Robert Stil, Head of Economic Analysis Team

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Market developments in NL

• The market moves towards bundled multi-play
  offers supplied by DSL and cable operators
• Cable operators successful in VoB, KPN introduces
  lP TV at large scale
• KPN rolling out fibre optic all-IP network to the
  street cabinets, thereby making MDF locations
  obsolete
• Consolidation of cable companies. 1 and 2
  control gt 90 of connections
• KPN is acquiring ISPs and independent DSL
  operators

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What is the likely scenario?

• A new monopoly, a wide oligopoly, a tight
  oligopoly, ..?
• Possible scenario A duopoly of vertically
  integrated operators offering (substitutable)
  multi-play bundles
• Research question Can a duopoly of KPN and a
  cable company be effectively competitive in the
  absence of regulation?

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Competition in oligopolies

• Non-competitive outcomes as a result of normal
  profit maximisation
• Degree of competition depends on
• Price () v.s. quantity competition (-) (
  Bertrand v.s. Cournot)
• Number of firms ()
• Level of product differentiation, switching
  costs, barriers to entry (-)
• Countervailing buying power (), bidding markets
  ()
• NRF threshold for intervention is a dominant
  position. Non competitive oligopoly is currently
  not captured under single dominance (monopoly) or
  joint dominance (tacit collusion).

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Collusion in oligopoly

• Tacit collusion behaviour aimed at reaching an
  implicit cooperative agreement
• Market circumstances that enable tacit collusion
• Few firms, high entry barriers, frequent
  interaction ()
• Market stability, transparency, symmetry ()
• Countervailing buying power, network effects (-)
• Structural links, multi market contact ()
• In the NRF tacit collusion is captured under the
  concept of joint dominance

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What drives competition in broadband?

• Europe
• ERG statement regulated intra-platform
  competition drives inter-platform competition
• Most competitive countries have cable platforms
  supplying broadband next to (regulated) DSL
• US
• Natural experiment in the US (deregulation of
  DSL line sharing)
• increased penetration speed DSL vs. Cable
• prices DSL dropped more than Cable prices
• Technology has replaced regulation as the main
  driver of competitive threat to the Bells.

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What is the most relevant model of oligopolistic
competition?

• Probably players set capacity first and then
  compete on prices -gt some form of capacity
  constraint
• Products are differentiated to a certain extent -
  gt no perfect substitutes
• Customers are locked in to a certain extent and
  face switching costs -gt some level of demand
  inelasticity
• Therefore No pure Bertrand type of competition.
  Cournot type more likely

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Results of the analysis (1)

• Likelihood of collusion ambiguous
• Essential criteria for collusion are met- Few
  firms, - high entry barriers, - frequent
  interaction
• But - market is highly dynamic, products are
  differentiated (-)- interoperability regulation
  neutralises network externalities ()

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Results of the analysis (2)

• Likelihood of a effective competition in the
  duopoly
• No pure price competition.
• Product differentiation
• Switching costs
• Low potential entry
• No countervailing buying power
• Significant risk that competition is not
  effective gt prices above long-run average costs,
  but lower than monopoly.

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Hypothesis

• If the electronic communications market in The
  Netherlands develops into a duopoly of cable and
  DSL, effective competition will not be a likely
  outcome, and the current regulatory framework is
  not able to deal with this situation.