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Essays in telecommunications economics [Elektronische Ressource] / vorgelegt von Gerrit Ulrich Heimeshoff

160 pages
Essays inTelecommunications EconomicsInaugural-Dissertationzur Erlangung des akademischen Grades eines Doktorsder Wirtschafts- und Sozialwissenschaften(Dr. rer. pol.)der Friedrich-Alexander-Universit t Erlangen-N rnbergvorgelegt von: Dipl.-Kfm. Gerrit Ulrich Heimesho⁄aus: OberhausenErstreferent: Prof. Dr. Justus HaucapZweitreferentin: Prof. Regina Riphahn, Ph.D.letzte Pr?fung: 17. November 2008Contents1 Preface 42 InvestmentinTelecommunicationsMarkets: ASurveyofTheoreticalResultsand Empirical Evidence 62.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.2 Micro- and Macroeconomic Aspects of Investments in Telecommunications In-frastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.3 Investments in Telecommunications Markets: The Theoretical Perspective . . . . 92.3.1 A Classi?cation of the Existing Theoretical Work . . . . . . . . . . . . . . 92.3.2 General Problems of Liberalization . . . . . . . . . . . . . . . . . . . . . . 122.3.3 Regulation of Access Charges . . . . . . . . . . . . . . . . . . . . . . . . . 182.3.4 Retail Price Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252.3.5 Preleminary Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352.3.6 Theoretical Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362.4 Regulation and Investment: The Empirical Perspective . . . . . . . . . . . . . . . 382.4.
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Essays inTelecommunications Economics
Inaugural-Dissertation
zur Erlangung des akademischen Grades eines Doktors
der Wirtschafts- und Sozialwissenschaften
(Dr. rer. pol.)
der Friedrich-Alexander-Universit t Erlangen-N rnberg
vorgelegt von: Dipl.-Kfm. Gerrit Ulrich Heimesho⁄
aus: OberhausenErstreferent: Prof. Dr. Justus Haucap
Zweitreferentin: Prof. Regina Riphahn, Ph.D.
letzte Pr?fung: 17. November 2008Contents
1 Preface 4
2 InvestmentinTelecommunicationsMarkets: ASurveyofTheoreticalResults
and Empirical Evidence 6
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 Micro- and Macroeconomic Aspects of Investments in Telecommunications In-
frastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3 Investments in Telecommunications Markets: The Theoretical Perspective . . . . 9
2.3.1 A Classi?cation of the Existing Theoretical Work . . . . . . . . . . . . . . 9
2.3.2 General Problems of Liberalization . . . . . . . . . . . . . . . . . . . . . . 12
2.3.3 Regulation of Access Charges . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.3.4 Retail Price Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.3.5 Preleminary Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.3.6 Theoretical Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.4 Regulation and Investment: The Empirical Perspective . . . . . . . . . . . . . . . 38
2.4.1 Classi?cation of the Existing Empirical Literature . . . . . . . . . . . . . 38
2.4.2 Empirical Results on the Firm Level . . . . . . . . . . . . . . . . . . . . . 39
2.4.3 Simulation Based Evidence on the E⁄ects of Access Charges on Invest-
ment Incentives on the Firm Level . . . . . . . . . . . . . . . . . . . . . . 44
2.4.4 Empirical Evidence on the Aggregate Level . . . . . . . . . . . . . . . . . 45
2.4.5 Comparison of Theoretical Hypotheses and Empirical Results . . . . . . . 49
2.4.6 Additional Evidence on the Relationship of Regulation and Investment. . 51
12.5 Approaches to Solve the Underinvestment Problem in Network Industries . . . . 52
2.5.1 Access Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.5.2 The Real Options Approach . . . . . . . . . . . . . . . . . . . . . . . . . . 54
2.5.3 Applicability of Access Holidays and Real Options Theory in Practice . . 57
2.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3 What Drives Investment in Telecommunications Markets: Evidence from
OECD Countries 69
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.2 Determinants of Investments: The Theoretical Perspective . . . . . . . . . . . . . 73
3.3 Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.4 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.4.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.4.2 Estimation Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.4.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
3.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
3.6 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
4 Competition in the German Mobile Telecommunications Market: An Em-
pirical Analysis of First Mover Advantages and Collusive Behaviour 100
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
4.2 The German Mobile Telecommunications Market . . . . . . . . . . . . . . . . . . 104
4.3 FMA and Collusive Behaviour: Some Theoretical Foundations . . . . . . . . . . 107
4.3.1 Causes and E⁄ects of FMA . . . . . . . . . . . . . . . . . . . . . . . . . . 107
4.3.2 Factors Driving Collusion on Mobile Communications Markets . . . . . . 109
4.4 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
4.4.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
4.4.2 Stability of the Market Structure . . . . . . . . . . . . . . . . . . . . . . . 112
4.4.3 AnAnalysisoftheRelationshipbetweentheCompetitorsontheGerman
Mobile Communications Market . . . . . . . . . . . . . . . . . . . . . . . 114
4.4.4 Long-Run Equilibria on the German Mobile Telecommunications Market 120
24.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
4.6 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
5 Fixed-Mobile Substitution in OECD Countries: An Empirical Analysis on
the Subscriber Level 137
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
5.2 Review of the Related Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
5.2.1 Theoretical Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
5.2.2 Empirical Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
5.3 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
5.3.1 Database . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
5.3.2 Empirical Speci?cation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
5.3.3 Empirical Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
5.4 Conclusion and Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . 149
5.5 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
3Chapter 1
Preface
In the past decades telecommunications markets all over the world have changed immensely.
Liberalization and privatization stimulated competition in ?xed line telecommunications and
helped increasing e¢ ciency. Prices in ?xed line telecommunications markets have decreased
signi cantly, and consumers have the choice between a large number of products and services.
During the last decade telecommunications regulators successfully opened the markets and
helped fostering competition, especially on the service level. However, recently new regulatory
challenges have arisen:
1. How should regulators stimulate investments to enable network providers to create next
generation networks?
2. Do we still need di⁄erent regulatory obligations for ?xed and mobile markets?
3. Doincumbentsinmobilemarketsstillhave?rstmoveradvantages,orhavetheylostthem
as a result of increasing competitive pressure?
These are important topics for future telecommunications regulation and this dissertation
triestogivesomeanswerstothequestionsstatedabove. The?rstpartdiscussestheoreticaland
empirical work on the determinants of telecommunications investments and presents two possi-
ble solutions to the investment problem. The second part empirically analyzes determinants of
telecommunicationsfor30OECDcountriesfrom1990to2003anddiscussesthemain?ndingsin
the context of the possible solutions presented in part one. In the third part of this dissertation
4competition in the German mobile telecommunications market is analyzed. The main question
is whether there are still ?rst mover advantages for T-Mobile and whether there is evidence of
collusive behaviour between T-Mobile and Vodafone. The question of substitutability between
?xed and mobile telecommunications is an important topic for regulatory agencies. In part
four we test, whether customers substitute between ?xed and mobile telecommunications on
the subscribers stage and discuss the question, if di⁄erent regulatory obligations for ?xed and
mobile markets are still needed.
ThisdissertationevolvedduringmytimeattheRuhr-UniversityofBochumandtheFriedrich-
Alexander-University of Erlangen-Nuremberg. First I want to thank my advisor Prof. Dr. Jus-
tus Haucap for his advice, encouragement, and providing a stimulating research environment
at his chair. Furthermore I want to thank my second advisor Prof. Regina Riphahn, Ph.D.
AdditionallyIwouldliketothankallmycolleaguesinBochumandNuremberg,especiallyAnna
G ddeke and Andre Uhde for their help. This dissertation owes a lot to Ralf Dewenter who
gave detailed comments on several drafts and helped to improve the empirical studies. Finally,
I would like to thank my family for their encouragement and help.
5Chapter 2
Investment in Telecommunications
Markets: A Survey of Theoretical
Results and Empirical Evidence
2.1 Introduction
Government always restricts personal freedom of individuals and their adequacy should be
carefullyevaluatedexante(Klodt,2003). Furthermore,suchregulatoryinterventionshavetobe
inanappropriaterelationtothegoalsofregulation. Theprimarygoalofeconomicregulationis
describedbystaticanddynamice¢ ciency(JoskowandRose,1989andArmstrong,Cowan,and
Vickers,1994). Fromastaticpointofviewmarketpowerhastoberestrictedtoavoidallocative
ine¢ ciencies as a result of restrictions in supply (Dixit, 1996). However static e¢ ciency is only
one part of economic e¢ ciency because dynamic e¢ ciency is important for economic e¢ ciency
results as well. Dynamic e¢ ciency can be de ned as the ability to reduce production cost
over time as a consequence of process innovation (Acocella, 1998). Another important aspect
of dynamic e¢ ciency is the introduction of new products and services. Dynamic e¢ ciency in
telecommunications markets implies market entry and infrastructure investments, which lead
ustothebasicmodesofcompetitionintelecommunicationsmarkets(Klodt,2003). Thesebasic
modes of competition are service competition and infrastructure competition or facilities-based
61competition. Service competition is especially important in the beginning of liberalization of
telecommunications markets, because the primary goal is lowering prices to enhance e¢ ciency.
Furthermore, service competition is extremely important because new competitors cannot to
set up their own infrastructure before entering the market. Instead they need access to the
incumbent s network to provide telecommunications services to their customers. Setting up an
own infrastructure is impossible in the short run and even in the long run not always possible,
2which is also supported by the so called Ladder of Investment Theory.
The importance of access to the incumbent s network is also re ected in the current debate
onaccessholidaysforDeutsche Telekom,theincumbentnetworkoperatorinGermany. In2005,
Deutsche Telekom announcedthatitwouldbuildnewhighspeedbroadband?breglassnetworks
in the 50 largest German cities. This investment project amounts to several billion Euros and
the rate of transmission in the network can be expanded from 16 to 50 megabit and even
3more. Deutsche Telekom argues that its new network represents an innovation and has asked
the Bundesnetzagentur, the German regulatory authority for network industries, to exempt it
from access regulation. The main argument is as follows: Investments are only undertaken if
the investor is able to obtain appropriate rents, at least for a limited period of time. However,
competitors do not share this argument. Instead they argue that the new broadband network
does not represent an innovation or a new market respectively. From their point of view it is
onlyaslightlymodi?ednetworkwithupgradedtechnology. Inthemeantimethe Bundestag,the
German parliament supplemented the German Telecommunications Act with a section which
enables the regulatory authority to exclude new markets from ex ante regulation for a period
of time. As a consequence the European Commission took this case to the European Supreme
Court, as it argues that the new German law violates European laws. It remains to be seen to
which decision the judges will come.
Coming back to market entry of new competitors one has to note that it takes quite a long
time until these competitors are able to enter infrastructure competition. At the beginning
of liberalization, some infrastructure competition is possible, because some new competitors
1For further discussion see Bourreau and Dogan (2004) and Dogan and Bourreau (2005).
2See Cave et al. (2004). The Ladder of Investment Theory will be discussed later.
3See also discussions in Handelsblatt (10/25/2005), Financial Times Deutschland (10/25/2005) and Frank-
furter Allgemeine (10/25/2005).
7belongtowellfundedgroupsofcompanies. Howeverthiswillnotbetheusualcase. Additionally
one has to ask, if duplication of existing infrastructure is economically reasonable or waste of
ressources. Clearly,itwouldnotbee¢ cienttoduplicatethelocallooporthelastmile,butthere
are several possibilities where duplication is not waste of ressources. Furthermore, one has to
note that service competition will always remain an important concept in telecommunications
regulation, because as mentioned above, some parts of the incumbent s network should not be
duplicated in order to avoid ine¢ cient outcomes. As a consequence, service competition and
infrastructure competition are likely to coexist in the future. The main problem in this context
is that the two forms of competition can not be promoted by identical regulatory actions.
The remainder of the paper is roganized as follows. In chapter 2.2 microeconomic and
macroeconomic aspects of telecommunications infrastructure will be discussed. Chapter 2.3
surveys the theoretical literature on investments in telecommunications markets as well as
related work and we derive hypotheses for empirical studies. Chapter 2.4 presents empirical
evidence on investments in telecommunications markets and compares the empirical ?ndings
with theoretical predictions. The following chapter 2.5 discusses possible solutions to foster
investments in telecommunications infrastructure such as access holidays and the real options
approach. Chapter 6 concludes.
2.2 Micro-andMacroeconomicAspectsofInvestmentsinTelecom-
munications Infrastructure
A high quality infrastructure is essential for sustainable economic growth (Gramlich, 1994,
Munnell, 1992). This conclusion especially holds for telecommunications infrastructure, as
shown by several empirical studies. R ller and Waverman (2001) have studied the e⁄ects of
infrastructure investments in telecommunications industries on economic growth for 21 OECD
countries from 1971 to 1990. They ?nd strong empirical evidence that investment in telecom-
munications infrastructure has signi cant positive impacts on economic growth. Alesina et al.
(2005) provide comparable results, also showing a positive e⁄ect of investments in telecommu-
nications on economic growth, but they note that investment incentives can be signi cantly
reduced by restrictive regulation. Norton (1992) looks at economic growth in countries with
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