Platform regulation in other industries:

Lessons from telecomsTommaso Valletti

Imperial College London, Telecom ParisTech and CEPRTOMMASO VALLETTI

Invisible prices (to us)

Interconnection between telecommunications networks

Call termination is one of the most important interconnection services

Interconnection prices are “invisible” to us, but affect competition and, ultimately, the tariffs we pay

TOMMASO VALLETTI

Very interesting findings

Competitive “bottlenecks”

Some prices are “monopolised”

“Two-sided” markets (platforms) and skewed pricing structures

Policy question: intervene to achieve efficiency (regulation vs. competition policy)

General features of 2SM

Relative prices versus rents General problem that applies to many

situations Two ways of looking at this problem:

– Even under perfect competition, a 2SM carries inefficiencies

– Intervention typical of 1SM does not work in 2SM

TOMMASO VALLETTI

Fallacies in 2SM

(LR)IC = efficient?

Individual mark-ups indicate market power?

More competition implies a more balanced price structure?

Removal of cross-subsidies will benefit the side that pays above (LR)IC?

TOMMASO VALLETTI

The “waterbed” effectMobile telephony largely unregulated, with the

important exception of Mobile Termination Rates (MTR)

Mobile customers bring a “termination rent”Competition for customers might exhaust this rentJustification for regulatory intervention to cut MTR

-> BUT this can potentially increase prices for mobile subscribers

This is the “waterbed” effect! (“Seesaw” in the US)

TOMMASO VALLETTI

Genakos and Valletti (JEEA, 2011)

Is there a waterbed effect?–MTR down -> retail prices up?

Is it “full”?–Sector fully competitive, so just a rebalancing of structure of prices?–Or market power, so negative impact on operators’ profits?

Empirical strategy–Exploit differential regulation between countries and, within countries, between operators

TOMMASO VALLETTI

Average Price Around the Introduction of Regulation

TOMMASO VALLETTI

Evolution of the waterbed effect (post-paid)

TOMMASO VALLETTI

Evolution of the waterbed effect (pre-paid)

TOMMASO VALLETTI

Main results, and why do we care

Waterbed effect strong and significant (-10% in MTR -> +5% in bill)

Effect diluted for pre-paid consumers, where regulation counteracts the “collusive” effect of access charges

Magnitude of the waterbed effect key to assess costs and benefits of regulation of termination charges (externalities and elasticities)

Implications for the current regulation of “roaming charges” within EU

Regulating “only” one price: Payment Protection Insurance (UK CC)TOMMASO VALLETTI

Static - What about investments

Another hot topic is “net neutrality”

Concern: technology allows Internet Service Providers (ISPs) to discriminate between data packets quite easily

Regulate the internet to preserve openness and neutrality?

Leave the internet free to develop according to market forces?

TOMMASO VALLETTI

Net neutrality

(Non-academic) debate can be summarised as follows:– CEO of AT&T (ISP): “Now what they would like to do is use my pipes

free, but I ain't going to let them do that. We have spent this capital and we have to have a return on it”

– Google (CP) affidavit to FCC: “The Internet is awesome, let’s keep it that way!”

Economic models to analyze the tension between content innovation and network expansion to avoid congestion: edge vs. core

Key is to understand elasticities of supply of “content” versus “capacity”TOMMASO VALLETTI