Network development and regulation in broadband markets
Creators: name: Silvestri, Virginia
Publisher: name: IMT Alti Studi Lucca
Year: 2012
Subjects: HB Economic Theory

description: This thesis analyses the issues related to broadband development, investment in Next Generation Networks (NGN) and regulation. The first chapter is a literature  review on the determinants of adoption and usage of broadband, on one side, and on the determinants of the investment incentives in NGN and the impact of regulation, on the other side. The second and the third chapters  are theoretical contributions to the literature on investment in NGN and regulation. We briefly describe the content of each chapter below. -   First Chapter: This study surveys the theoretical literature and empirical evidence on two parallel and related issues regarding broadband development: the demand-side determinants of broadband adoption and usage and the relationship between investment incentives and regulation. The first section presents the results found in the literature on the main drivers of broadband adoption. We report also the empirical literature which attempts to disentangle ”adoption” from ”usage” of broadband. Further, the effect of location on adoption is examined, mainly regarding the rural/urban digital divide. Then, the interaction between fixed and mobile broadband is analysed, particularly discussing whether the adoption of fixed broadband and mobile broadband follows similar or diverging patterns. The second section reviews the literature  regarding the determinants of the incentives to invest in broadband and their relationship with the regulatory framework. We also report the most recent studies on the main issues regarding the development of the Next Generation  Networks (NGN). -   Second Chapter: A vertically integrated incumbent and an OLO (Other Licensed Operator) compete in the market for broadband access. The incumbent has the option to invest in building a Next Generation Network that covers all  urban areaswith similar demand structures. The investment return in terms of demand increase is uncertain. We compare the impact of different access regulation regimes - full regulation, partial regulation (only the copper network  is regulated), risk sharing - on investment incentives and social welfare. We find that, when the alternative for the OLO is using the copper network rather than leaving the market entirely, exclusion of the OLO does not necessarily  happen in equilibrium even when the incumbent is better in offering valueadded services. Risk sharing emerges as the most preferable regime both from a consumer and a social welfare perspective for a large range of parameters. -   Third Chapter: We model the competition between an incumbent firm and an Other Licensed Operator (OLO) in the broadbandmarket, where the incumbent has an investment option to build a Next Generation Network (NGN) and  it can do so by making a risk sharing agreement with the OLO, or alone. Differently from other theoretical research, we discuss about two different kinds of risk sharing contractual forms – basic risk sharing, where no side-payment is given for the use of the NGN between co-investors, and joint-venture risk sharing, where a side-payment is set by the co-investing firms – and we compare them with the scenario in which the incumbent invests on a stand-alone basis. Then, we consider the introduction of a late entrant and we examine the  related impact on the robustness of the risk sharing agreement and the equilibrium results. We find that risk sharing can potentially be beneficial in terms of competition and investments, but the number of firms involved matters and so does the choice of the NGN access price, for insiders and outsiders of the agreement. Although eventually the regulators’ objective is having no more network duplication and all operators using the NGN, it might not be an optimal strategy to start with all the firms in the market involved in a risk sharing agreement, unless the insiders NGN access charge is constrained at zero. Even when the presence of firms outside of the agreement force insiders to compete more fiercely, there might be a concern with the potential exclusion of the  outsiders from the NGN. Therefore, a light regulation imposing no exclusion would be advisable.