Abstract
Regulated access schemes shape incentives for both investment and entry in next-generation networks. We study in a general duopoly setting whether and how risk premia, access options or long-term contracts improve those incentives as compared to standard access pricing. The first two do so: Risk premia guarantee highest coverage, while distorting retail pricing. Access options safeguard undistorted retail competition, but are not effective in the most costly areas. On the other hand, long-term contracts have little scope to increase coverage because they intensify retail competition.
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Notes
See Abrardi and Cambini (2019) for a survey about the impact of ultra-fast broadband investment on different economic dimensions.
Clark and Easaw (2007) use an option pricing approach to define access charges assuming fixed retail prices. Competitive effects are therefore absent in their model.
Any investment by entrants would occur in areas already covered by the incumbent, such as cities. Since we want to focus on coverage of marginal areas, we abstract from entrant investment. Moreover, we assume that next generation retail services are so superior to copper-based services that previous copper coverage and access provisions do not matter.
Willingness to pay in different areas may be correlated, but this will not be relevant for what follows.
It would be natural to assume that the incumbent’s profits and consumer surplus are increasing in \(\delta \), but this assumption is not needed.
This augmented WACC is then applied to the fixed capital employed to obtain a capital cost estimate, after which an estimate of operating costs is added.
We have made a weaker assumption on the entrant; but e.g. with quantity competition and strategic substitutes its profits are indeed decreasing in the access charge.
We assume here that access without option payment is no longer offered. If it was still available, then one would set a lower access charge in return for the option payment, \({\tilde{a}}<a\), and the constraint on the option price would be stricter, \(A\le E[\varPi _{e}^{*}({\tilde{a}},\delta )-\varPi _{e}^{*}(a,\delta )]\). As a result, achievable coverage is lower.
As pointed out by Inderst and Peitz (2014), combining an access option with a lower access charge, while increasing consumer surplus, further reduces investment incentives since the retail market becomes more competitive.
While in the present setting the entrant will be worse off since the option price extracts part or all of his expected profits, access options continue to be welfare-superior when the entrant cannot be made worse off, e.g. if the standard access tariff a were still available. But coverage cannot be increased, as \(E[(\varPi _{0}^{*} +\varPi _{e}^{*})({\tilde{a}},\delta )-\varPi _{e}^{*}(a,\delta )]<E[\varPi _{0}^{*}(a,\delta )]\) for \({\tilde{a}}<a\).
This would be the case without fixed costs. In their presence there would still be a monopoly in the very worst demand states.
In the simulation in the Online Appendix, a small committed quantity raises coverage by a little if uncertainty is high, and not at all if it is low. Higher committed quantities lower coverage significantly, though.
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We would like to thank the Editor, an anonymous referee, and audiences at PEJ 2019 in Evora and EARIE 2019 in Barcelona for their helpful comments.
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Marc Bourreau acknowledges financial support from the Orange/Telecom Paris partnership. Carlo Cambini has been partially supported by “Ministero dell’Istruzione, dell’Università e della Ricerca” award “TESUN-83486178370409 finanziamento dipartimenti di eccellenza CAP. 1694 TIT. 232 ART. 6”. Steffen Hoernig was funded by Fundação para a Ciência e a Tecnologia (UID/ECO/00124/2013, UID/ECO/00124/2019 and Social Sciences DataLab, LISBOA-01-0145-FEDER-022209), POR Lisboa (LISBOA-01-0145-FEDER-007722, LISBOA-01-0145-FEDER-022209) and POR Norte (LISBOA-01-0145-FEDER-022209).
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Bourreau, M., Cambini, C., Hoernig, S. et al. Fiber investment and access under uncertainty: long-term contracts, risk premia, and access options. J Regul Econ 57, 105–117 (2020). https://doi.org/10.1007/s11149-020-09402-3
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DOI: https://doi.org/10.1007/s11149-020-09402-3