Upstream regulation in mature network industry: evidence from Nordic mobile telecommunications markets

ABSTRACT

This article investigates the effects of upstream regulation that aims to create niches and attract new type of entrants on the competitive environment of downstream markets. Using unique cross-country data of Nordic mobile telecommunications markets, we show that upstream regulation leads to (i) increases in both number and aggregate market share of service-based providers in the downstream market, (ii) an increase in the number of service-based providers, thus increasing their aggregate market share, but no opposite direction of results and (iii) a lower retail price level, proxied by average revenue per user. Our findings imply that upstream regulation may be able to achieve better outcomes when the policy objectives are to revitalize mature network industries and to enhance consumer welfare.

KEYWORDS:

• Vertical restraints
• access regulation
• retail competition
• market structure

JEL CLASSIFICATION:

• L42
• L51
• L96

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ A large body of studies (e.g. Nitsche and Wiethaus 2011; Kim et al. 2011; Manenti and Scialà 2013; Briglauera, Eckera, and Guglerb 2013; Papaioannou 2017) investigates the relation between upstream regulation and facility investment incentives in telecommunications. They conclude that the regulation lowers the level of investments, which is not desirable for dynamic efficiency. A relatively small body of theoretical studies like Klumpp and Su (2010) and Vareda and Hoernig (2010) states that open access is desirable even after considering dynamic efficiency. Chipty (2001) also provides an empirical finding that integrated cable operators exclude downstream rivals (channels).

² Service-based providers are further classified as (i) resellers or (ii) Mobile Virtual Network Operators (MVNOs). Technically, reseller and MVNO are different in that MVNOs own one or more components of network switching subsystems while resellers have none. The economic implications of both reseller and MVNO are similar.

³ 3Riccardi, Ciriani, and Bertrand (2009) is the only empirical study of this topic. However, they do not address the endogeneity issue.

⁴ Until recently, delayed investment in telecommunications has been an important issue in many EU countries and the US, while it has never been as such in East Asian countries.

⁵ The main objective of the directive is unifying European markets, expecting to reinforce competition and promoting investment into new infrastructures (Tsatsou 2010).

⁶ Each Nordic country’s regulatory agencies are as follows: NPT (Norway), FICORA (Finland), PTS (Sweden), NITA (Denmark) and PTA (Iceland). We use the version from PTS, NPT, FICORA, NITA and PTA (2006).

⁷ To facilitate price competition in the downstream mobile telecommunications service itself, some countries (e.g. Finland and Korea) has illegalized network operators’ behaviour to provide handset subsidies which usually target less loyal users.

⁸ The existence of access price regulation automatically implies the existence of mandatory access provision in our data.

⁹ The penetration rate had continuously increased with time, but had already reached greater than 70% in 2000. To the contrary, from 1999 to 2005, the minutes of voice traffic per year in Finland had increased from 1475 to 2075, let alone text messages and other services.

¹⁰ Due to the lack of reliable unit-root/stationary test for our mini panel, it is proper to regard this test result as a peripheral evidence to support our main results.

¹¹ The conundrum around the separation of network and service, or upstream and downstream, is somewhat inevitable in any network industry. For example, Beard, Macher, and Vickers (2016) investigate unbundling issues in railroad industry regulation.

¹² For example, major mobile network providers such as TeliaSonera and Telenor operate in multiple Nordic countries.