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Coexistence of service- and facility-based competition: The relevance of access prices for "make-or-buy"-decisions

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Author Info

  • Bender, Christian M.
  • Götz, Georg

Abstract

This paper models competition between two firms, which provide broadband Internet access in regional markets with different population densities. The firms, an incumbent and an entrant, differ in two ways. First, consumers bear costs when switching to the entrant. Second, the entrant faces a make-or-buy decision in each region and can choose between service-based and facility-based entry. The usual trade-off between static and dynamic efficiency does not apply in the sense that higher access fees might yield both, lower retail prices and higher total coverage. This holds despite a strategic effect in the entrant's investment decision. While investment lowers marginal costs in regions with facility-based entry, it intensifies competition in all regions. We show that the cost-reducing potential of investments dominates the strategic effect: Higher access fees increase facility-based competition, decrease retail prices and increase total demand. --

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Bibliographic Info

Paper provided by International Telecommunications Society (ITS) in its series 21st European Regional ITS Conference, Copenhagen 2010: Telecommunications at new crossroads - Changing value configurations, user roles, and regulation with number 3.

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Date of creation: 2010
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Handle: RePEc:zbw:itse10:3

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Web page: http://www.itseurope.org/

Related research

Keywords: Broadband access markets; facility- and service-based entry; investments; economies of density; switching costs;

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References

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  1. Paula Sarmento & António Brandão, 2006. "Access Pricing: A Comparison Between Full Deregulation and Two Alternative Instruments of Access Price Regulation, Cost-Based and Retail-Minus," CEF.UP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 0603, Universidade do Porto, Faculdade de Economia do Porto.
  2. Bourreau, Marc & Dogan, Pinar, 2004. "Service-based vs. facility-based competition in local access networks," Information Economics and Policy, Elsevier, Elsevier, vol. 16(2), pages 287-306, June.
  3. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
  4. Chen, Yongmin, 2001. "On Vertical Mergers and Their Competitive Effects," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 667-85, Winter.
  5. Faulhaber, Gerald R & Hogendorn, Christiaan, 2000. "The Market Structure of Broadband Telecommunications," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 48(3), pages 305-29, September.
  6. David Mandy, 2009. "Pricing inputs to induce efficient Make-or-Buy decisions," Journal of Regulatory Economics, Springer, Springer, vol. 36(1), pages 29-43, August.
  7. Hoernig, Steffen & Pita Barros, Pedro Luis & Valletti, Tommaso, 2001. "Universal Service and Entry: the Role of Uniform Pricing and Coverage Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2789, C.E.P.R. Discussion Papers.
  8. Nina Czernich & Oliver Falck & Tobias Kretschmer & Ludger Woessmann, 2009. "Broadband Infrastructure and Economic Growth," CESifo Working Paper Series 2861, CESifo Group Munich.
  9. Lars-Hendrik Roller & Leonard Waverman, 2001. "Telecommunications Infrastructure and Economic Development: A Simultaneous Approach," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 909-923, September.
  10. Philip Gayle & Dennis Weisman, 2007. "Are input prices irrelevant for make-or-buy decisions?," Journal of Regulatory Economics, Springer, Springer, vol. 32(2), pages 195-207, October.
  11. Bourreau, Marc & Dogan, Pinar, 2005. "Unbundling the local loop," European Economic Review, Elsevier, Elsevier, vol. 49(1), pages 173-199, January.
  12. Cave, Martin & Vogelsang, Ingo, 0. "How access pricing and entry interact," Telecommunications Policy, Elsevier, Elsevier, vol. 27(10-11), pages 717-727, November.
  13. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  14. repec:reg:wpaper:603 is not listed on IDEAS
  15. Krafft, Jackie & Salies, Evens, 2008. "The diffusion of ADSL and costs of switching Internet providers in the broadband industry: Evidence from the French case," Research Policy, Elsevier, Elsevier, vol. 37(4), pages 706-719, May.
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Cited by:
  1. Noriaki Matsushima & Keizo Mizuno, 2012. "Infrastructure Upgrades and Foreclosure with Coexistence of Service-Based and Facility-Based Firms," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0860, Institute of Social and Economic Research, Osaka University.

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