Transcript Ex ante - David Flacher

Symposium EAEPE and PRESOM
Liberalization of the telecommunications
sector: Stakes and limits
David Flacher¹ & Hugues Jennequin¹,²
¹ : Paris XIII University CEPN – CNRS UMR 7115
² : Rouen University, CARE
Contents
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Introduction
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The liberalization in Europe
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Investment, innovation and regulation
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Foreign experiences: USA and Korea
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Conclusion
Introduction

Introducing competition in the European
telecommunications sector (around the 90’s)
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Is this policy efficient?
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Aims at increasing consumer and global welfare
Ex ante regulation is needed to introduce effective
competition
Which kind of policies apply in the future framework of
telecommunications regulation in 2010?
Crucial question since telecom is a crucial sector for
the whole economy
Liberalization (in Europe):
Why?

Why did EU open the telecom sector to
competition?
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Perfect competition model theoretically
considered as the optimal one (global welfare) 
allocative efficiency
The X-inefficiency theory defended by
Leibenstein (1966)
Dynamic efficiency: innovation  efficiency gains
and cost reductions
Liberalization: How?

Distinction between
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ex ante (introducing effective competition through
asymmetrical regulation)
and ex post (concerning abuses of dominant position)
Two layers

The lower one: infrastructures
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With strong economies of scale (essential facility: problem for
facility-based competition)
Accessing this layer is needed to remove entry barriers
The upper one: the services offered to consumers

Weaker economies of scale but network externalities
Liberalization in Europe, How?
Ex ante regulation
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Ex ante regulation consists in
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Market structure regulation (licensing)
or price regulation of wholesale and retail markets
This “stepping stone” regulation is supposed to be only
transitory before competition law (ex post) applies:
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First step: low enough wholesale prices for resale (controlling anticompetitive practices and attracting new competitors)
Second step: low enough prices for the access to the essential
facilities infrastructures (unbundling, for instance)
Third step: Higher prices for the access to the infrastructure in order
to incite competitors to invest in their own infrastructure
 To a service-based competition to a facility-based competition 
ladder of investment
Liberalization in Europe: a
brief history

1987
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1993
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Complete liberalization (including basic services and infrastructures)
since 1998 and process of liberalization
2002: new telecom framework (being changes currently)
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Green book to protect the monopoly for basic services (fixed
telephony…) but to liberalize the others, to organize competition with
fair access to incumbents networks
Independence of the NRA
Principle of technological neutrality
Establishing a list of 18 relevant markets with and the powers of NRA
2008 (?): application of a new framework…
Limits of the liberalization
process: Econometrical studies

Ambiguous effect of the liberalization process on the
performances of the sector (productivity, prices,
employment, quality of services…)

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Boylaud & Nicoletti, 2001; Wallsten, 2001; Bortolotti &
al., 2002; Li & Xu, 2002; Uri, 2003
The facts:

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Global decrease in investment and employment since 2001
R&D which favours the short term programs
Investment and innovation
problem

Some theoretical approaches explain underinvestment when price regulation applies

Jorde, Sidak & Teece (2000)

Ex ante regulation of network elements (through mandatory
unbundling on a cost-oriented and non discriminatory basis)
reduces incumbents’ investment both in
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maintaining and improving the networks
but also in adopting new techniques because regulation reduces
the option value of investing (real option theory).
Regulation delays competitor’s investment since they are able
to take advantage of incumbents’ investment without taking
risks.
Investment and innovation
problem

Foros (2004) and Kotakorpi (2006) show that
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investment into services improvement usually
decreases when access rate is regulated.
Bourreau & Dogan (2005) show that
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low unbundling rates can lead to underinvestment in new infrastructures
since competitors prefer to rent it rather than
building a new and innovating one.
A current evolution enhancing this
investment problem
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Convergence of techniques leads to convergence of the usages
(telecommunications, hardware, software, contents…).
Sector specific development will come from high broadband
networks (FTTH)  how to build it? Risks and uncertainties
appear:

the demand side
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the regulatory one
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Will the investors be obliged to unbundle their infrastructure on a cost oriented
basis?
the supply (technological) side
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Will consumers use very high broadband?
Will new techniques, especially wireless ones, make FTTH non profitable enough
in a near future?
What about the free rider behavior (Skype; Google): a Schumpeterian view more
destructive than creative?
The question of Universal Service : What happens for new services?
Foreign experiences: The USA case
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Four differences:
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An earlier regulation
A dismantlement of the private monopoly (AT&T) in 1984
Differences in the market structure (cable, low regulated)
Legal proceedings with, recently (2005):
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a final decision against FTTH unbundling (at least for many years)
The main argument of RBOC was that they would not have
incentives to develop new infrastructures (such as optical fiber
local loop) if they would be obliged, once the infrastructure built,
to offer a cost oriented and non discriminatory access to their
competitor.
Foreign experiences: The Korean
case
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Institutional transformation in the 80’s and mainly in the 90’s, with
the aim of introducing competition in the telecommunications
sector.
Two major differences can be noted with the European model:

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Absence of an independent NRA
Existence of an industrial polic
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Korea decided
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Public policy aiming at promoting the specific development of a sector, in particular
with incentives and grants mechanisms
not to require the FTTH unbundling
State’s direct and indirect help for infrastructure deployment but also
for developing new services and applications (IT839…)
The sector appears to be one of the most efficient in the world.
Conclusion
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Three options:
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Maintain the current regulation with ex ante asymmetric
price regulation and intervention if operators appear
dominant on a market
Replace ex ante by ex post regulation
Take into account the macro-strategic dimensions of
developing the telecommunications sector at the national
and international level and the importance of institutions in
the country’s technological path following a vertical
industrial policy
 An intermediate option between ex ante and ex
post regulation seems to emerge in Europe