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Non-cost-raising discrimination: A rationale for functional separation in broadband open access


  • Hervas-Drane, Andres

    () (IESE Business School)


I present a vertical differentiation model to assess the quality-wise strategy of an incumbent telecommunications operator under open access regimes. I show that it is always profitable for an incumbent subject to wholesale regulation to degrade wholesale quality in a non-recoverable fashion. The findings are robust to the number of competitors and the price cap level, unlike those predicted by the cost-raising discrimination paradigm. I also show that functional separation, a structural remedy aimed at separating the incumbent's wholesale and retail operations, better aligns supply-side incentives with those of consumers. The analysis suggests that structural remedies exhibit good properties to implement open access regimes.

Suggested Citation

  • Hervas-Drane, Andres, 2011. "Non-cost-raising discrimination: A rationale for functional separation in broadband open access," IESE Research Papers D/942, IESE Business School.
  • Handle: RePEc:ebg:iesewp:d-0942

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    References listed on IDEAS

    1. Bourreau, Marc & Dogan, Pinar, 2005. "Unbundling the local loop," European Economic Review, Elsevier, vol. 49(1), pages 173-199, January.
    2. Rubinfeld, Daniel L & Singer, Hal J, 2001. "Vertical Foreclosure in Broadband Access?," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 299-318, September.
    3. Wauthy, Xavier, 1996. "Quality Choice in Models of Vertical Differentiation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(3), pages 345-353, September.
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    6. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    7. Esther Gal-Or, 1983. "Quality and Quantity Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 590-600, Autumn.
    8. David Sappington, 2005. "Regulating Service Quality: A Survey," Journal of Regulatory Economics, Springer, vol. 27(2), pages 123-154, November.
    9. Avinash Dixit, 1979. "Quality and Quantity Competition," Review of Economic Studies, Oxford University Press, vol. 46(4), pages 587-599.
    10. Bustos Alvaro E & Galetovic Alexander, 2009. "Vertical Integration and Sabotage with a Regulated Bottleneck Monopoly," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-52, September.
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    12. Acharyya, Rajat, 1998. "Monopoly and product quality: Separating or pooling menu?," Economics Letters, Elsevier, vol. 61(2), pages 187-194, November.
    13. Beard, T Randolph & Kaserman, David L & Mayo, John W, 2001. "Regulation, Vertical Integration and Sabotage," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 319-333, September.
    14. David Mandy & David Sappington, 2007. "Incentives for sabotage in vertically related industries," Journal of Regulatory Economics, Springer, vol. 31(3), pages 235-260, June.
    15. Foros, Oystein, 2004. "Strategic investments with spillovers, vertical integration and foreclosure in the broadband access market," International Journal of Industrial Organization, Elsevier, vol. 22(1), pages 1-24, January.
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    More about this item


    Broadband Regulation; Open Access; Quality Service; Discrimination;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications


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