Platform regulation in other industries: Lessons from telecoms Tommaso Valletti Imperial College London, Telecom ParisTech and CEPR TOMMASO 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” effect  Mobile telephony largely unregulated, with the important exception of Mobile Termination Rates (MTR)  Mobile customers bring a “termination rent”  Competition for customers might exhaust this rent  Justification 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