January  2022, 9(1): 33-74. doi: 10.3934/jdg.2021024

Explaining the definition of wholesale access prices in the Portuguese telecommunications industry

1. 

Economics Department, Faculty of Economics, University of Porto, Porto, Portugal

2. 

Rua Dr. Roberto Frias, N/A, 4200-464 Porto, Portugal

3. 

Electrical and Computer Engineering Department, Faculty of Engineering, University of Porto

* Corresponding author: Vitor Miguel Ribeiro

Received  February 2021 Revised  August 2021 Published  January 2022 Early access  October 2021

Fund Project: Authors were supported by the following projects and grants: DigEcoBus - NORTE-01-0145-FEDER-028540, STRIDE - NORTE-01-0145-FEDER-000033, Emprego altamente qualificado nas empresas ou em COLABS e/ou Contratação de Recursos Humanos Altamente Qualificados - NORTE-06-3559-FSE-0000164, and 2020 AI for COVID-19 Data Science and Artificial Intelligence - DSAIPA-CS-0086-2020. This research has also been financed by Portuguese public funds through FCT - Fundação para a Ciência e a Tecnologia, I.P., in the framework of R & D Units SYSTEC - reference POCI-01-0145-FEDER-006933 and Cef.UP - reference UIDB/04105/2020

The 2016–2018 triennium was a period marked by a fierce dispute between the European Commission and Autoridade Nacional de Comunicações, Portugal, on the need to regulate wholesale access prices. While the European Commission defended the imposition of Fiber-To-The-x regulation in non-competitive areas, the Portuguese sectoral regulator argued in favor of the persistence of Fiber-To-The-x deregulation. Following a Game Theory approach, the present study demonstrates that the transition from Fiber-To-The-x deregulation to Fiber-To-The-x regulation should only occur when a given territorial unit becomes a competitive area since the subgame perfect Nash equilibrium captures a regulatory framework optimally characterized by the imposition of active access price deregulation (regulation) in non-competitive (competitive) areas, that is, local administrative units characterized by a weak (strong) degree of vertical spillover, respectively. Meanwhile, ducts access regulation must be permanently imposed throughout the national territory, despite it can be relaxed in competitive areas if the regulator imposes intra-flexibility to establish a monopolistic bottleneck to ensure social welfare maximization. Previous conclusions require to introduce both facility-based and service-based competition at the entry stage as well as active and passive obligations at the regulation stage in a multi-stage game with complete information. The present analysis legitimizes the emergence of a new optimization theory in the telecommunications literature, whose modus operandi is contrary to (coincident with) the ladder of investment theory in non-competitive (competitive) areas, respectively. Differently from the view sustained by the ladder of investment theory, which defends that a short-term regulatory touch combined with long-term market deregulation is a socially optimal strategy, the new theory confirms that a regulatory intervention is socially desirable only in the long run. The conceptual refinement is meticulously explained and labeled as the theory of creative creation because, differently from the Schumpeterian gale of creative destruction, whose processes of industrial mutation are permanently market-driven by assumption, a period of regulatory holidays followed by successive regulatory interventions dependent on the degree of vertical spillover observed in the telecommunications industry can effectively promote investment realization that continuously revolutionizes the market structure from within, incessantly destroying the old technology. The theory of creative creation reflects the regulatory framework currently in force in the Portuguese Telecommunications Industry.

Citation: Vitor Miguel Ribeiro, Fernando Lobo Pereira, Rui Gonçalves. Explaining the definition of wholesale access prices in the Portuguese telecommunications industry. Journal of Dynamics and Games, 2022, 9 (1) : 33-74. doi: 10.3934/jdg.2021024
References:
[1]

ANACOM, Final decision on the consideration of Commission Recommendation of 29.11.2016 on cases PT/2016/1888 and PT/2016/1889: Wholesale local access provided at a fixed location and wholesale central access provided at a fixed location for mass-market products - Reasoned justification for deciding not to amend or withdraw the draft measure, 2017. Available from: https://www.anacom.pt/streaming/FinalDecision23March2017considerationEC_Recommendation.pdf?contentId=1414023&field=ATTACHED_FILE.

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M. BacacheM. Bourreau and G. Gaudin, Dynamic Entry and Investment in New Infrastructures: Empirical Evidence from the Fixed Broadband Industry, Rev. Ind. Organ., 44 (2014), 179-209. 

[4]

W. J. BaumolJ. A. Ordover and R. D. Willig, Parity pricing and its critics: A necessary condition for efficiency in the provision of bottleneck services to competitors, Yale J. Regul., 14 (1997), 145-164. 

[5]

W. J. Baumol and J. G. Sidak, The pricing of inputs sold to competitors, Yale J. Regul., 11 (1994), 171-202.  doi: 10.2139/ssrn.289386.

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M. BourreauC. Cambini and P. Doğan, Access pricing, competition, and incentives to migrate from "old" to "new" technology, Int. J. Ind. Organ., 30 (2012), 713-723.  doi: 10.1016/j.ijindorg.2012.08.007.

[11]

M. BourreauC. Cambini and P. Doğan, Access regulation and the transition from copper to fiber networks in telecoms, J. Regul. Econ., 45 (2014), 233-258.  doi: 10.1007/s11149-014-9245-z.

[12]

M. BourreauC. Cambini and S. Hoernig, Ex-ante regulation and co-investment in the transition to next generation access, Telecom. Pol., 36 (2012), 399-406.  doi: 10.2139/ssrn.2000694.

[13]

M. BourreauP. Doğan and M. Manant, A critical review of the "ladder of investment" approach, Telecom. Pol., 34 (2010), 683-696.  doi: 10.1016/j.telpol.2010.09.002.

[14]

M. BourreauJ. HombertJ. Pouyet and N. Schutz, Upstream competition between vertically integrated firms, J. Ind. Econ., 59 (2011), 677-713. 

[15]

M. BourreauP. Lupi and F. M. Manenti, Old technology upgrades, innovation, and competition in vertically differentiated markets, Inf. Econ. Pol., 29 (2014), 10-31.  doi: 10.1016/j.infoecopol.2014.08.001.

[16]

W. Briglauer, How EU sector-specific regulations and competition affect migration from old to new communications infrastructure: Recent evidence from EU-27 member states, J. Regul. Econ., 48 (2015), 194-217.  doi: 10.1007/s11149-015-9283-1.

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W. BriglauerC. Cambini and M. Grajek, Why is Europe lagging on next generation access networks?, Brueg. Pol. Contrib., 14 (2015), 1-13. 

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W. Briglauer and K. Gugler, The deployment and penetration of high-speed fiber networks and services: Why are EU member states lagging behind?, Telecom. Pol., 37 (2013), 819-835.  doi: 10.1016/j.telpol.2013.05.003.

[19]

D. BritoP. Pereira and J. Vareda, Incentives to invest and to give access to non-regulated new technologies, Inf. Econ. Pol., 24 (2012), 197-211.  doi: 10.1016/j.infoecopol.2012.08.005.

[20]

C. Cambini and Y. Jiang, Broadband investment and regulation: A literature review, Telecom. Pol., 33 (2009), 559-574.  doi: 10.1016/j.telpol.2009.08.007.

[21]

M. Cave, Encouraging infrastructure competition via the ladder of investment, Telecom. Pol., 30 (2006), 223-237.  doi: 10.1016/j.telpol.2005.09.001.

[22]

M. Cave, Snakes and ladders: Unbundling in a next generation world, Telecom. Pol., 34 (2010), 80-85.  doi: 10.1016/j.telpol.2009.11.006.

[23]

J. ConfrariaT. Ribeiro and H. Vasconcelos, Analysis of consumer preferences for mobile telecom plans using a discrete choice experiment, Telecom. Pol., 41 (2017), 157-169.  doi: 10.1016/j.telpol.2016.12.009.

[24]

European Commission, Commission decision concerning case PT/2016/1888 and case PT/2016/1889, 2016. Available from: https://www.anacom.pt/streaming/ResponseEC29July2016.pdf?contentId=1403390&field=ATTACHED_FILE.

[25]

European Commission, Commission recommendation of 11 September 2013 on consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment, Official J. European Union, (2013). Available from: http://data.europa.eu/eli/reco/2013/466/oj.

[26]

European Commission, Directive 2014/61/EU of the European Parliament and of the Council of 15 May 2014 on measures to reduce the cost of deploying high-speed electronic communications network, Official J. European Union, (2014). Available from: https://eur-lex.europa.eu/eli/dir/2014/61/oj.

[27]

European Commission, Directive of the European Parliament and of the council establishing the European Electronic Communications Code, Official J. European Union, (2016). Available from: http://data.europa.eu/eli/dir/2018/1972/oj.

[28]

European Commission, European Commission recommendation on regulated access to Next Generation Access Networks (NGA), 2010. Available from: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010H0572&from=EN.

[29]

European Commission, Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, 2002. Available from: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52002XC0711(02)&from=EN.

[30]

European Commission, Trends in European broadband markets, 2014. Available from: https://digital-strategy.ec.europa.eu/en/library/scoreboard-2014-trends-european-broadband-markets-2014.

[31]

D. FudenbergR. GilbertJ. Stiglitz and J. Tirole, Preemption, leapfrogging and competition in patent races, Eur. Econ. Rev., 22 (1983), 3-31.  doi: 10.1016/0014-2921(83)90087-9.

[32]

M. Grajek and L.-H. Röller, Regulation and investment in network industries: Evidence from European telecoms, J. Law Econ., 55 (2012), 189-216.  doi: 10.1086/661196.

[33]

F. Höffler and K. M. Schmidt, Two tales on resale, Int. J. Ind. Organ., 26 (2008), 1448-1460.  doi: 10.2139/ssrn.1075023.

[34]

J. Huige and M. Cave, Regulation and the promotion of investment in next generation networks – A European dilemma, Telecom. Pol., 32 (2008), 713-721.  doi: 10.1016/j.telpol.2008.08.004.

[35]

D. M. Kreps and R. Wilson, Sequential equilibria, Econometrica, 50 (1982), 863-894.  doi: 10.2307/1912767.

[36]

J.-J. Laffont and J. Tirole, Access pricing and competition, Eur. Econ. Rev., 38 (1994), 1673-1710.  doi: 10.1016/0014-2921(94)90046-9.

[37] J.-J. Laffont and J. Tirole, Competition in Telecommunications, MIT University Press, Cambridge, 2000. 
[38]

R. Lestage and D. Flacher, Infrastructure investment and optimal access regulation in the different stages of telecommunications market liberalization, Telecom. Pol., 38 (2014), 569-579.  doi: 10.1016/j.telpol.2014.01.003.

[39]

P. Sarmento and A. Brandão, Access pricing: A comparison between full deregulation and two alternative instruments of access price regulation, cost-based and retail-minus, Telecom. Pol., 31 (2007), 236-250.  doi: 10.1016/j.telpol.2007.03.003.

[40] J. Schumpeter, Capitalism, Socialism and Democracy, Harper Press, New York, 1942. 
[41]

T. Shortall and M. Cave, Is symmetric access regulation a policy choice? Evidence from the deployment of NGA in Europe, Com. Strat., 98 (2015), 17-41. 

[42] J. Tirole, The Theory of Industrial Organization, MIT University Press, Cambridge, 1988. 
[43]

I. Vogelsang, The endgame of telecommunications policy? A survey, Rev. Econ., 64 (2013), 193-270.  doi: 10.1515/roe-2013-0301.

[44]

I. Vogelsang, Price regulation of access to telecommunications networks, J. Econ. Lit., 41 (2003), 830-862.  doi: 10.1257/jel.41.3.830.

[45]

I. Vogelsang, The role of competition and regulation in stimulating innovation–Telecommunications, Telecom. Pol., 41 (2017), 802-812.  doi: 10.1016/j.telpol.2016.11.009.

show all references

References:
[1]

ANACOM, Final decision on the consideration of Commission Recommendation of 29.11.2016 on cases PT/2016/1888 and PT/2016/1889: Wholesale local access provided at a fixed location and wholesale central access provided at a fixed location for mass-market products - Reasoned justification for deciding not to amend or withdraw the draft measure, 2017. Available from: https://www.anacom.pt/streaming/FinalDecision23March2017considerationEC_Recommendation.pdf?contentId=1414023&field=ATTACHED_FILE.

[2]

K. J. Arrow, Economic welfare and the allocation of resources for invention, in The Rate and Direction of Inventive Activity: Economic and Social Factors, Princeton University Press, 1962,609-626. doi: 10.1515/9781400879762-024.

[3]

M. BacacheM. Bourreau and G. Gaudin, Dynamic Entry and Investment in New Infrastructures: Empirical Evidence from the Fixed Broadband Industry, Rev. Ind. Organ., 44 (2014), 179-209. 

[4]

W. J. BaumolJ. A. Ordover and R. D. Willig, Parity pricing and its critics: A necessary condition for efficiency in the provision of bottleneck services to competitors, Yale J. Regul., 14 (1997), 145-164. 

[5]

W. J. Baumol and J. G. Sidak, The pricing of inputs sold to competitors, Yale J. Regul., 11 (1994), 171-202.  doi: 10.2139/ssrn.289386.

[6] W. J. Baumol and J. G. Sidak, Toward Competition in Local Telephony, MIT University Press, Cambridge, 1994. 
[7]

BEREC, Report on challenges and drivers of NGA rollout and infrastructure competition, 2016. Available from: https://berec.europa.eu/eng/document_register/subject_matter/berec/reports/6488-berec-report-challenges-and-drivers-of-nga-rollout-and-infrastructure-competition.

[8]

BEREC, Regulatory Accounting in Practice 2014, 2014. Available from: https://berec.europa.eu/eng/document_register/subject_matter/berec/reports/4595-berec-report-regulatory-accounting-in-practice-2014.

[9]

BEREC, Report on access to physical infrastructure in the context of market analyses, 2019. Available from: https://berec.europa.eu/eng/document_register/subject_matter/berec/reports/8597-berec-report-on-access-to-physical-infrastructure-in-the-context-of-market-analysis.

[10]

M. BourreauC. Cambini and P. Doğan, Access pricing, competition, and incentives to migrate from "old" to "new" technology, Int. J. Ind. Organ., 30 (2012), 713-723.  doi: 10.1016/j.ijindorg.2012.08.007.

[11]

M. BourreauC. Cambini and P. Doğan, Access regulation and the transition from copper to fiber networks in telecoms, J. Regul. Econ., 45 (2014), 233-258.  doi: 10.1007/s11149-014-9245-z.

[12]

M. BourreauC. Cambini and S. Hoernig, Ex-ante regulation and co-investment in the transition to next generation access, Telecom. Pol., 36 (2012), 399-406.  doi: 10.2139/ssrn.2000694.

[13]

M. BourreauP. Doğan and M. Manant, A critical review of the "ladder of investment" approach, Telecom. Pol., 34 (2010), 683-696.  doi: 10.1016/j.telpol.2010.09.002.

[14]

M. BourreauJ. HombertJ. Pouyet and N. Schutz, Upstream competition between vertically integrated firms, J. Ind. Econ., 59 (2011), 677-713. 

[15]

M. BourreauP. Lupi and F. M. Manenti, Old technology upgrades, innovation, and competition in vertically differentiated markets, Inf. Econ. Pol., 29 (2014), 10-31.  doi: 10.1016/j.infoecopol.2014.08.001.

[16]

W. Briglauer, How EU sector-specific regulations and competition affect migration from old to new communications infrastructure: Recent evidence from EU-27 member states, J. Regul. Econ., 48 (2015), 194-217.  doi: 10.1007/s11149-015-9283-1.

[17]

W. BriglauerC. Cambini and M. Grajek, Why is Europe lagging on next generation access networks?, Brueg. Pol. Contrib., 14 (2015), 1-13. 

[18]

W. Briglauer and K. Gugler, The deployment and penetration of high-speed fiber networks and services: Why are EU member states lagging behind?, Telecom. Pol., 37 (2013), 819-835.  doi: 10.1016/j.telpol.2013.05.003.

[19]

D. BritoP. Pereira and J. Vareda, Incentives to invest and to give access to non-regulated new technologies, Inf. Econ. Pol., 24 (2012), 197-211.  doi: 10.1016/j.infoecopol.2012.08.005.

[20]

C. Cambini and Y. Jiang, Broadband investment and regulation: A literature review, Telecom. Pol., 33 (2009), 559-574.  doi: 10.1016/j.telpol.2009.08.007.

[21]

M. Cave, Encouraging infrastructure competition via the ladder of investment, Telecom. Pol., 30 (2006), 223-237.  doi: 10.1016/j.telpol.2005.09.001.

[22]

M. Cave, Snakes and ladders: Unbundling in a next generation world, Telecom. Pol., 34 (2010), 80-85.  doi: 10.1016/j.telpol.2009.11.006.

[23]

J. ConfrariaT. Ribeiro and H. Vasconcelos, Analysis of consumer preferences for mobile telecom plans using a discrete choice experiment, Telecom. Pol., 41 (2017), 157-169.  doi: 10.1016/j.telpol.2016.12.009.

[24]

European Commission, Commission decision concerning case PT/2016/1888 and case PT/2016/1889, 2016. Available from: https://www.anacom.pt/streaming/ResponseEC29July2016.pdf?contentId=1403390&field=ATTACHED_FILE.

[25]

European Commission, Commission recommendation of 11 September 2013 on consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment, Official J. European Union, (2013). Available from: http://data.europa.eu/eli/reco/2013/466/oj.

[26]

European Commission, Directive 2014/61/EU of the European Parliament and of the Council of 15 May 2014 on measures to reduce the cost of deploying high-speed electronic communications network, Official J. European Union, (2014). Available from: https://eur-lex.europa.eu/eli/dir/2014/61/oj.

[27]

European Commission, Directive of the European Parliament and of the council establishing the European Electronic Communications Code, Official J. European Union, (2016). Available from: http://data.europa.eu/eli/dir/2018/1972/oj.

[28]

European Commission, European Commission recommendation on regulated access to Next Generation Access Networks (NGA), 2010. Available from: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32010H0572&from=EN.

[29]

European Commission, Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, 2002. Available from: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52002XC0711(02)&from=EN.

[30]

European Commission, Trends in European broadband markets, 2014. Available from: https://digital-strategy.ec.europa.eu/en/library/scoreboard-2014-trends-european-broadband-markets-2014.

[31]

D. FudenbergR. GilbertJ. Stiglitz and J. Tirole, Preemption, leapfrogging and competition in patent races, Eur. Econ. Rev., 22 (1983), 3-31.  doi: 10.1016/0014-2921(83)90087-9.

[32]

M. Grajek and L.-H. Röller, Regulation and investment in network industries: Evidence from European telecoms, J. Law Econ., 55 (2012), 189-216.  doi: 10.1086/661196.

[33]

F. Höffler and K. M. Schmidt, Two tales on resale, Int. J. Ind. Organ., 26 (2008), 1448-1460.  doi: 10.2139/ssrn.1075023.

[34]

J. Huige and M. Cave, Regulation and the promotion of investment in next generation networks – A European dilemma, Telecom. Pol., 32 (2008), 713-721.  doi: 10.1016/j.telpol.2008.08.004.

[35]

D. M. Kreps and R. Wilson, Sequential equilibria, Econometrica, 50 (1982), 863-894.  doi: 10.2307/1912767.

[36]

J.-J. Laffont and J. Tirole, Access pricing and competition, Eur. Econ. Rev., 38 (1994), 1673-1710.  doi: 10.1016/0014-2921(94)90046-9.

[37] J.-J. Laffont and J. Tirole, Competition in Telecommunications, MIT University Press, Cambridge, 2000. 
[38]

R. Lestage and D. Flacher, Infrastructure investment and optimal access regulation in the different stages of telecommunications market liberalization, Telecom. Pol., 38 (2014), 569-579.  doi: 10.1016/j.telpol.2014.01.003.

[39]

P. Sarmento and A. Brandão, Access pricing: A comparison between full deregulation and two alternative instruments of access price regulation, cost-based and retail-minus, Telecom. Pol., 31 (2007), 236-250.  doi: 10.1016/j.telpol.2007.03.003.

[40] J. Schumpeter, Capitalism, Socialism and Democracy, Harper Press, New York, 1942. 
[41]

T. Shortall and M. Cave, Is symmetric access regulation a policy choice? Evidence from the deployment of NGA in Europe, Com. Strat., 98 (2015), 17-41. 

[42] J. Tirole, The Theory of Industrial Organization, MIT University Press, Cambridge, 1988. 
[43]

I. Vogelsang, The endgame of telecommunications policy? A survey, Rev. Econ., 64 (2013), 193-270.  doi: 10.1515/roe-2013-0301.

[44]

I. Vogelsang, Price regulation of access to telecommunications networks, J. Econ. Lit., 41 (2003), 830-862.  doi: 10.1257/jel.41.3.830.

[45]

I. Vogelsang, The role of competition and regulation in stimulating innovation–Telecommunications, Telecom. Pol., 41 (2017), 802-812.  doi: 10.1016/j.telpol.2016.11.009.

Figure 1.  Equilibrium number of facility-based competitors. Red line represents the number of facility-based firms in NC areas. Gray line represents the number of facility-based firms that would be sustained in case of FTTx regulation in the subdomain $ 0\leq\beta<0.4476. $ Black (Blue) line represents the number of facility-based firms in C areas when the duopolistic bottleneck with asymmetric downstream access (monopolistic bottleneck) is sustained in equilibrium, respectively
Figure 2.  Equilibrium wholesale access prices. Red (Blue) [Black] lines represent the parameter space where the triopoly (monopolistic bottleneck) [duopolistic bottleneck with asymmetric downstream access] is sustained in equilibrium, respectively. Continuous (Dashed) lines represent the regulated active access price (ducts access fee), respectively. The plot assumes $ a = 1 $
Figure 3.  Equilibrium investment level of the facility-based operators. Red (Blue) [Black] lines represent the parameter space where the triopoly (monopolistic bottleneck) [duopolistic bottleneck with asymmetric downstream access] is sustained in equilibrium, respectively. Continuous (Dashed) [Dotted] lines represent investment level of the incumbent (first alternative facility-based) [second alternative facility-based] operator, respectively. The right middle panel compares the profit level of the facility-based competitors I and N. Gray lines represent the investment level that would be achieved if FTTx regulation were adopted in the subdomain $ 0\leq\beta<0.4476 $. The last subplot captures the total amount of investment in the telecommunications industry. The plot assumes $ a = 1 $
Figure 4.  Equilibrium prices and quantities in the retail market. Red (Blue) [Black] lines represent the parameter space where the triopoly (monopolistic bottleneck) [duopolistic bottleneck with asymmetric downstream access] holds in equilibrium, respectively. Continuous (Dashed) [Dotted] lines represent retail prices and market share of the incumbent (alternative facility-based) [alternative service-based] operator, respectively. The plot assumes $ a = 1 $
Figure 5.  Equilibrium profits. Red (Blue) [Black] lines represent the parameter space where the triopoly (monopolistic bottleneck) [duopolistic bottleneck with asymmetric downstream access] is sustained in equilibrium, respectively. Continuous (Dashed) [Dotted] lines represent profit of the incumbent (alternative facility-based) [alternative service-based] operator, respectively. The left bottom panel compares the profit level of the facility-based competitors I and N. Gray lines represent the profit level that would be obtained if FTTx regulation were adopted in the subdomain $ 0\leq\beta<0.4476 $. The plot assumes $ a = 1 $
Figure 6.  Equilibrium consumer surplus, producer surplus and social welfare. Gray lines represent the level of social welfare that would be achieved if FTTx regulation were adopted in the subdomain $ 0\leq\beta<0.4476 $. The deadweight loss in NC areas corresponds to the space between the red and gray line in the subdomain $ 0\leq\beta<0.4476 $ that can be observed in the right bottom panel. The plot assumes $ a = 1 $
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