competition in mobile communications and the allocation...
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EU DG CompetitionEconomic Advisory Group Telecommunications
Competition in Mobile Communicationsand the Allocation of Scarce Resources:
The Case of UMTS
Jörn Kruse
1 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Content
1 Scarce Spectrum and Licensing in Mobile Communic.
2 Scarcity, Spectrum Prices and Efficiency
3 How to Allocate Spectrum
4 License and Spectrum Allocation in GSM and UMTS
5 Competition Intensity in GSM and UMTS
2 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
3 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
1 Scarce Spectrum and Licensing in Mobile
Communications
License Requirements constitute Entry Barriers and (potential) Inefficiencies
Spectrum is limited -
overall and due to intermodal spectrum allocation
Spectrum Divisibility is limited due to Economies of Scale
Proper intramodal spectrum allocation is the economic rationale for Licensing
Significance of Spectrum Availability
4 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
TACAICBAC
AIC1
AIC2
AIC3
TrafficQ1 Q2 Q3 x
TAC1
TAC2
TAC3
BACA
BACA shows Economies of Scale ,AICi : Av. Incremental Cost of Cell Splitting,TACi : Average Costs
2 Scarcity, Spectrum Prices and Efficiency
5 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Factor Substitution (mobile comm production function)
Spectrum vs base station equipment etc. (cell splitting) Spectrum rivalry between different Spectrum Usages (intermodal)
Services and applications (mobile comm, broadcasting, etc.),
different factor substitution in different usages → Efficiency requires Spectrum Prices
(prices according to degree of scarcity)
Intramodal Spectrum Prices
6 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Price
SD3
SD2
SD1
C
SS*
P2A
P3B
0 Q1 Q* QG Spectrum
D
Q4
Intermodal Spectrum Allocation
7 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Spectrum PriceSpectrum Price
E
SDA
T
SDH
D
S
SDJ
U
V
J
R
H
OR0D QH Q* QS QJ
P2
Ps
PJ
P1
B
C
F
SDB
3 How to allocate Spectrum
8 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Objectives
� Efficiency of Mobile MarketsCompetition Intensity vs. Scale Economies
� Transaction Costs, Non-Discrimination, Transparency� Social Objectives
Regional Coverage, Universal Service� Fiscal objectives (???)
Methods
� Criteria/Beauty Contest� Auction
Allocation Methods
9 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Efficiency of
Mobile Markets
Transaction Cost Time
Non-discriminating, Transparent
Social and fiscal objectives
Governments Influence
(from their point of view)
first come first served
-- + -- - -
Lottery -- ++ ++ -- --
Auction ++ + depends
++ ++ --
Discretionary Decisions
-- depends
depends -- depends ++
Beauty Contest/ Criteria Contest
+ depends
-- - depends
depends +
Features of Spectrum Auctions
10 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
� Auctions pick the expectedly most-efficient operator,
if willingness to pay = efficiency
(no winners curse / no unrealistic assessments)
� No discrimination (i.e. foreign companies), transparent
� Transaction costs may be low, quick
� Spectrum Fees do not increase consumers� prices,
since / if fees are fixed and sunk
Auction Spectrum Fees (if very high) may endanger firms� Financial Stability
(Auctions in UK and Germany for many European firms)
Auction Methods compared
11 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Low Risk of Collusion
Low Risk of Entry-Block
Endogenous Information
for the Regulator
High Bidder Information
and Low Risk-
Aversion
Suitability for multiple-
object cases with complex cost and/or
demand efficiencies
1 2 3 4 5 6
English Auction (ascending A.)
- - - - 0 + + +
Dutch Auction (descending A.)
+ + + + - - - -
First Price SB (discriminating A.)
+ + + + + - -
Second Price SB (Vickrey A.)
- - + + - - -
Mostly Used: English Auctions + Suitable, Comfortable - Higher Risk of Collusion and Entry Blocking 0 Bidder Info (to prevent Winners Curse) may be questionable after UMTS in UK and Germany
4 License and Spectrum Allocation in GSM and UMTS
12 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
90 91 92 93 94 95 96 97 98 99 00 01
Netherlands
Denmark
Germany
United Kingdom
Austria
Sweden
Italy
Hungary
Belgium
Finland
France
Greece
Poland
Portugal
Spain
Switzerland
Ireland
Czech Republic
Iceland
Luxembourg
Norway
90 91 92 93 94 95 96 97 98 99 00 01
1 Betreiber2 Betreiber3 Betreiber4 Betreiber5 und mehr Betreiber
GSM Licensing: Step-by-Step
UMTS Spectrum Allocation in Europe
13 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Country Month Method Number of licences
Spectrum Fees
(Euro per population)
Cost-Index per
population per license
United Kingdom
April 2000
Auction 5 648 32.40
Germany August 2000
Auction 6 endogenous
610 36.60
Italy October 2000
Auction 5 212 10.60
Netherlands July 2000
Auction 5 171 8.55
France February 2001
Beauty contest
2 169 3.38
Austria November 2000
Auction 6 endogenous
103 6.18
Poland December 2000
Beauty contest
3 51 1.51
Belgium March 2001
Auction 3 44 1.32
Portugal December 2000
Beauty contest
4 40 1.59
Switzerland December 2000
Auction 4 19 0.76
Spain March 2000 Beauty contest
4 13 0.53
Norway December 2000
Beauty contest
4 11 0.44
Sweden December 2000
Beauty contest
4 0.0 0.00
Finland March 1999 Beauty contest
4 free -
UMTS Auction Spectrum Fees
14 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
� Spectrum Fees via Auctions higher than BC (administratively set) Fees
� Auction Theory Explanations are limited.
Outcomes rather specific for indiv. Country, time etc.
Time of Auction in UK + Germany (Internet + Mobile Hype)
→ Winners Curse (esp. newcomers), shock for the following auctions
� Number of UMTS Licenses mostly higher (+1) than number of GSM incumbents
� UK and Germany "strategic countries" for firms with "European approach�
� Germany: Entry blocking or econ. Reasons, quality / cost AC(15) < AC(10) ?
Newcomers� winners curse, market structure (2-2-2)
5 Competition Intensity in GSM and UMTS
15 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
1995 2002 future
Structural Feature/Factor
Assess.
Relevance für high (+)
+ low (-) competition-
Intensity
Assess.
Relevanz für high (+)
+ low (-) competition-
Intensity
Assess.
Relevanz für high (+)
+ low (-) competition-
Intensity a b c d e f g 1 Number of
Operators small
- relatively
small + medium +
Concentration very high
- high o
2 Entry Barriers high - - high - high o
3 Fixed Costs very high
+ + very high
+ + very high
+ +
4 Sunk Costs very high
o very high
+ very high
+
5 Elasticity of MarketDemand,
Substitution
low - high + very high
+ +
6 Homogeneity und
Transparency
high + + high + + high + +
7 Switching Costs medium o medium - low +
8 Technical and Economic Dynamics
high - medium + low ++
9 Total moderate relatively high
high
16 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
UMTS infrastructure sharing
UMTS is late, cost-intensive and success is uncertainfirst years may be crucial
RAN-Sharing (esp. in first years) will reduce costs,increases + enlarges UMTS-development (services)
RAN-Sharing is not a Problem for Competition,even pro-competitive for services markets
17 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Competition Policy or Regulation ?
Mobile Markets have been very successful,* because of low regulation (except licensing),* because they are competitive
Mobile Markets would be harmed by new RegulationCost coverage diff for indiv Tariff-elements (Ramsey)
(1) Mobile Carrier Selection* would be inefficient (alloc, cost)* would dramatically increase regulation
(origination, third-party billing)(2) Mobile Termination
* if there is a problem... : Competition Policy
Comments Welcome
18 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
joern.kruse@unibw-hamburg.de
20 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Abb. AS-6-3: Herfindahl-Index für diverse Länder im Zeitablauf
0
2000
4000
6000
8000
10000
1.Hj. 1994
2.Hj. 1994
1.Hj. 1995
2.Hj. 1995
1.Hj. 1996
2.Hj. 1996
1.Hj. 1997
2.Hj. 1997
1.Hj. 1998
2.Hj. 1998
1.Hj. 1999
2.Hj. 1999
1.Hj. 2000
2.Hj. 2000
1.Hj. 2001
01.09.2001
Schweiz
Österreich
Deutschland
Frankreich
Italien
Niederlande
Spanien
Schweden
Großbritannien
Finland
Fixed Costs and competitive Incentives
21 Prof. Dr. Jörn Kruse, Universität der Bundeswehr Hamburg
Fig. DG4-513: Incentives with high and low fixed and variable costs Low fixed costsFK=1000, VK=90/ME
0
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Quantity
Pric
e
+2000+1000+/-0
-500FK
VK
+4000
+6000
+8000
+10000
+12000
+14000
+16000
High fixed costsFK=9000, VK=10/ME
0
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Quantity
Pric
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+2000+1000+/-0-500
-2500
-5000
-7500
+4000
+6000
+8000
+10000
+12000
+14000
+16000
VK
FK
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