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Access price structure and entrant build-or-buy incentives in mobile markets

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Abstract

We consider a market structure with three mobile providers, two of which are vertically integrated with nationwide coverage. The third provider (an entrant) invests in partial coverage and needs to rent access from one of its rivals. Competition between the vertically integrated providers in the access market may drive them to offer an access price structure that benefits the entrant. For a given level of the access price, the entrant benefits from an access price structure that reduces its need to invest. If asymmetric regulation is imposed whereby only one of the vertically integrated firms (the incumbent) face restrictions on which access price structure it can offer, the access price could be higher than in an unregulated economy. This provides a cautionary tale for competition authorities as well as sector-specific regulators, both of which typically only impose restrictions on the incumbent. The paper is motivated by the Norwegian mobile market, where the competition authorities imposed a fine of 78 million euros on Telenor (the dominant incumbent) for allegations of the abuse of market power by changing the access price structure and thereby hampering an entrant’s investment incentives.

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Notes

  1. Higher spectrum bands (bandwidth) have less capability of passing through walls, etc., compared to lower frequency bands. As a consequence, more base stations are required to deliver coverage as well as capacity. This could make 5G more dependent on network sharing agreements than 4G, even in urban areas. Gruber (2005) provides a detailed description of the economics of mobile networks.

  2. After a wave of mergers, several empirical analyses have investigated the relationship between the number of competing networks and consumer prices [Ofcom (2016), among others]. BEREC (2018b) and the European Commission (2017) provide suitable surveys. The main findings are that reducing the number of networks from five to four does not imply a significant increase in consumer prices, unlike a reduction from four to three networks.

  3. This may be of crucial importance as 5G (the present state-of-the-art mobile system) becomes more widely deployed. BEREC (2018a, 2018b) and Geradin and Karanikioti (2020), among others, expect that infrastructure sharing will become increasingly important.

  4. One exception is a recent statement of objections from the European Commission (2019) regarding the mobile market in the Czech Republic, which expressed concern that investment incentives were being hampered by a network sharing agreement.

  5. The largest fine imposed by the NCA prior to this was 140 million Norwegian kroner. Alongside Telenor, Telia is a vertically integrated provider with a nationwide coverage. There was a complete merger between Network Norway and Tele2 in 2013, and, in 2015, Tele2 and Telia merged. The network infrastructure of Tele2, the third network (with only partial coverage), was sold to Ice as a remedy in the Tele2-Telia merger in 2015. Consequently, Ice has a network with partial coverage and currently has a national roaming agreement with Telia.

  6. Telenor accentuates that the level of the access price was reduced at the same time as the SIM card fee was introduced, such that downstream competition was intensified. The Competition Authority replies that the reason for the average access price reduction was a stricter enforcement of margin-squeeze requirements (which we interpret as a price cap in our analysis).

  7. For a dominant vertically integrated firm, like Telenor, the competition law may de facto imply an obligation to make an offer to the non-integrated rival (as illustrated by the case at hand). To be more specific, a dominant vertically integrated firm has a duty to respond to a request from an access buyer; the seminal competition case on access to essential facilities within the EU is “Case C-7/97 Oscar Bronner” from 1998. Furthermore, during the roll-out of 2G/3G coverage from the mid 90’s, vertically integrated incumbents were obligated by sector-specific regulation to offer national roaming to entrants without own nationwide coverage. Obligations on national roaming are widely used as a remedy in merger cases (BEREC 2018a, b). In the majority of the European national markets there are now no sector-specific obligations to provide national roaming since there are three or more network providers in most markets. Wholesale access and call origination (previously market 15) was removed from the list of markets with a presumption of need of regulation in 2007 (European Commission 2007). There are exceptions, however, among them Norway, with only two full-scale vertically integrated providers (Telenor, the incumbent, and Telia). Telenor is still obligated to offer national roaming [see the description in BEREC (2018a)].

  8. Note that in such a two-part tariff, there is no fixed fee that is independent of number of users and usage. Fixed fees independent of the number of users and usage are not used in the marketplace as far as we know. However, in several merger cases, obligations on national roaming are used as a remedy. In these cases, the roaming tariff typically includes a fixed fee for a given amount of usage [see BEREC (2018b)].

  9. In a court case, Telenor vs. Telia, in 2018 (Borgarting Court of Appeal 2018, p. 33) the Court of Appeal makes the following statement: “As regards whether SIM card fees [a user-based access price]...is a widespread commercial practice, the Court of Appeal remarks that the actual pricing structure with SIM card fee is not unique to Telenor’s access agreements, cf. the information that Telia also operates with such an [access] pricing structure.” As emphasized in footnote 7 above, in 2015 there was a merger between Telia and Tele2 (NCA, 2015). As a remedy of the merger, Tele2’s partial network was sold to Ice and, in addition the competition authority accepted a national roaming agreement between Telia and Ice. The contract is secret, but in the significant market power (SMP) analysis (in market 15), the sector-specific authorities state that a SIM card fee was a part of this agreement (Nkom 2016, paragraph 455): “Nkom emphasizes the negative effects associated with the agreement containing a fixed fee per SIM card. This fee implies that ICE will face a fixed cost per subscription that will persist as long as the firm relies on buying national roaming”. The citations are translated from Norwegian, since the original documents are in Norwegian.

  10. Bourreau et al. (2011) use the fixed broadband market as an example where vertically integrated firms compete in the downstream market and, at the same time, they may compete in upstream market where they provide access to non-integrated rivals. Licensing of technologies is another example mentioned by Bourreau et al. (2011). In several grocery markets, we observe that vertically integrated chains may provide access to their (upstream) procurement and distribution networks to, typically smaller, rivals in the downstream market. In such a case, the access buyer may face a build-or-buy decision similar to what we analyze with respect to (partial) backward integration into distribution and procurement.

  11. Gayle and Weisman (2007) show that the result in Sappington (2005) depends on the choice of model of competition. Mandy (2009) generalizes these results and derives necessary and sufficient conditions for efficient make-or-buy decisions. Avenali et al. (2010) add a dynamic dimension to the model, while Bloch and Gautier (2017) extend the modeling environment to fixed costs of investment.

  12. In the strand of literature where an incumbent both invests and offers access to entrant(s), Klumpp and Su (2010) and Nitsche and Wiethaus (2011) study the link between access-price regulation and investment incentives.

  13. Vogelsang (2003) provides a survey on the literature on access price regulation within telecommunications markets.

  14. The rental rate is typically for the usage (voice, text, and data) of each customer of the access buyer. Consequently, it does not directly depend on coverage. However, it is reasonable to believe that the higher the degree of own coverage is (for the access buyer), the lower will be the usage of roaming capacity.

  15. We would obtain symmetric results if we started with firm 2 always offering an access contract.

  16. We have assumed seamless interconnection between the access seller and the access buyer. A well-known problem for a mobile provider with partial coverage is that it does not manage to use its own coverage in an efficient way. In the case at hand, the NCA (2018, p. 37) describes that when the entrant (Mobile Norway) had a coverage of 40%, it only managed to place 25% of its customers’ traffic in its own network. We abstract from this issue in the present model, since it is not qualitatively important for our results.

  17. In the Norwegian case, the entrant’s own coverage was just 40% when the change in the access price structure took place, see footnote 17. Hence, the choice of going to nationwide coverage was not an alternative in the short run. This is illustrated by the fact that Ice, the current owner of the third network, still needs a national roaming agreement with one of the incumbents, see footnote 6.

  18. From (5) we find that firm 3 will have a positive profit margin if \( A_{1}=s_{1}+{w_{1}}(K-k_{3})<10t/27.\) This condition is equivalent to \( 10t-27(s_{1}+{w_{1}}K)>0\) and thus the numerator in (10) is positive. The denominator is positive whenever the SOC, \(d^{2}\Pi _{3}^{*}/dk_{3}^{2}=-\left( 50t\sigma -27{w_{1}}^{2}\right) /(50t)<0,\) is satisfied.

  19. In fact, this issue is somewhat more complicated. Differentiating (9) with respect to \(s_{1}\) we find

    $$\begin{aligned} \frac{d}{ds_{1}}\left( \frac{d\Pi _{3}}{dk_{3}}\right)= & {} {w_{1}}\frac{dD_{3}}{ dA_{1}}\frac{dA_{1}}{ds_{1}}-\frac{6}{5t}(\frac{dp_{3}}{dA_{1}}-1)\frac{ dA_{1}}{ds_{1}}{w_{1}} \\= & {} -\frac{9}{10t}{w_{1}}+\frac{18}{50t}{w_{1}}=-\frac{27}{50}\frac{{w_{1}}}{t}. \end{aligned}$$

    The first term on the right hand side of this expression is negative; other things equal, firm 3’s investment incentives fall because \(D_{3}\) is decreasing in \(s_{1}.\) The second term of the expression is positive, reflecting the fact that the strategic effects identified in (8) become less pronounced when \(A_{1}\) increases, because firm 3’s profit margin falls. As expected, the first term dominates.

  20. For the last term in (11) we have \(\frac{d\left[ (p_{3}^{*}-A_{1})\Omega \right] }{d{w_{1}}}=\Omega \frac{d(p_{3}^{*}-A_{1})}{d{w_{1}}}+(p_{3}^{*}-A_{1})\frac{d\Omega }{d{w_{1}}}.\) The expression \(\Omega \frac{d(p_{3}^{*}-A_{1})}{d{w_{1}}}\) is positive (since \(\frac{d(p_{3}^{*}-A_{1})}{d{w_{1}}}<0\) and \(\Omega <0),\) while \( (p_{3}^{*}-A_{1})\frac{d\Omega }{d{w_{1}}}=-(p_{3}^{*}-A_{1})\left( \frac{\partial D_{3}^{*}}{\partial p_{1}^{*}}\frac{dp_{1}^{*}}{ dA_{1}}+\frac{\partial D_{3}^{*}}{\partial p_{2}^{*}}\frac{ dp_{2}^{*}}{dA_{1}}\right) \) is negative. The term \(\frac{d\left[ (p_{3}^{*}-A_{1})\Omega \right] }{d{w_{1}}}\) therefore has an ambiguous sign.

  21. Parameter values in Fig. 1: \(K=1/2,~t=1,~\sigma =1,\) and \(s_{1}=0.\)

  22. Such asymmetric regulations, e.g., carrier-of-last resort constraints, have been common feature in telecommunications and other regulated industries both within the EU and in the United States.

  23. As documented in the Introduction, Telia (firm 2) uses an access price that includes a SIM card fee.

  24. Telia has strengthened its market share in the upstream access market with respect to service provider/MVNO agreements as well as national roaming. Currently Ice, the provider with a partial coverage, buys national roaming from Telia. When Tele2 merged with Telia in 2015, Tele2’s partial coverage network was sold to Ice as a remedy (see footnote 6).

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Correspondence to Øystein Foros.

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Appendix

Appendix

1.1 Appendix A1: Proofs of Proposition 3

Proof of Proposition 3

Result (a) follows directly from the insights on pricing from the previous propositions. The rest of the proof deals with the case \({\bar{A}}<A^{crit}\). In this case, we know from Lemma 1 that each of the two vertically integrated firms would like to be the one entering into an access agreement with firm 3. Note first that whatever access price \(A_{1}\le {\bar{A}}\) that is offered by firm 1, firm 2 will win the contract with firm 3. This can be done by offering \(A_{2}=A_{1}\) and shifting the payment structure so that \( s_{2}\) is slightly higher and \(w_{2}\) slightly lower than what firm 1 offers, but without changing the overall tariff (the operating profits of firm 3 remain unchanged but it saves on investment costs, and prefers the contract with firm 2). Since profit \(\pi _{ij}\) is increasing in \({\bar{A}}\) for \({\bar{A}}<A^{crit},\) firm 1 will set \(A_{1}={\bar{A}}\) to ensure that \( A_{2} \) is as high as possible and thus maximize its own profit.

If firm 1 were to provide access at price \(A_{1}={\bar{A}}.\) Using that \( A_{1}={w_{1}}(K-k_{3})\) when \(s_{1}=0\) and inserting this into Eq. (10), we find

$$\begin{aligned} {\bar{w}}({\bar{A}})= & {} 5\frac{5Kt\sigma -\sqrt{25K^{2}t^{2}\sigma ^{2}-2t\sigma {\bar{A}}\left( 10t-27{\bar{A}}\right) }}{10t-27{\bar{A}}},{\bar{s}}=0\,\,\text {and } \\ {\bar{k}}_{3}({\bar{A}})= & {} K-\frac{{\bar{A}}}{{\bar{w}}({\bar{A}})}. \end{aligned}$$

Substituting \(A_{1}\) for \({\bar{A}}\) in Eq. (12), we further have

$$\begin{aligned} {\bar{\pi }}_{11}({\bar{A}})&=\frac{1}{27}t+{\bar{A}}\frac{5t-9{\bar{A}}}{10t},~\bar{ \pi }_{21}({\bar{A}})\nonumber \\&=\frac{1}{27}t+{\bar{A}}\frac{20t+27{\bar{A}}}{100t},\ \bar{\pi }_{31}({\bar{A}})=\frac{1}{27}t-{\bar{A}}\frac{20t-27{\bar{A}}}{100t}. \end{aligned}$$
(16)

Net profit for firm 3 equals

$$\begin{aligned} \Pi _{31}({\bar{A}})={\bar{\pi }}_{31}({\bar{A}})-C({\bar{k}}_{3}({\bar{A}})). \end{aligned}$$
(17)

Equations (16) and (17) show the profit levels in an outcome where firm 1 and 3 are access partners. If firm 2 wants to secure the contract with firm 3, this is the minimum profit level it needs to ensure that firm 3 receives (a sort of participation constraint).

To go into the details of the access price offered by firm 2, note from Eq. (16) that firm 2 is indifferent per se to the structure of \(A_{2}.\) However from (17) we can see that for a given access cost, it is more attractive for firm 3 to connect to firm 2 the lower is \(w_{2}\) (because this allows firm 3 to save on investment costs). This is mirrored by the fact that the lower is \(w_{2},\) the higher firm 2 can set \(A_{2}\) compared to \(A_{1}\) and still be attractive to firm 3. It follows that if being the access provider is profitable for firm 2, it will have no incentive to set \(w_{2}>0.\) We can therefore conclude that \(A_{2}=s_{2}.\) With such a contract it will be optimal for firm 3 to make zero investments (\(k_{3}=0)\), and simply rent full network coverage from firm 2. This is of course an extreme result. It is straightforward to show that \(w_{2}>0\) and \(k_{3}>0\) if the marginal cost of providing network access is positive, but it does not change any of the qualitative results.

Since firm 1 offers access to firm 3 at price \({\bar{A}},\) firm 2 cannot win the contract with firm 3 unless \(\pi _{32}=\Pi _{32}\ge \Pi _{31}({\bar{A}})\) . The optimal value of \(A_{2}\) is thus a function of \({\bar{A}};~A_{2}=A_{2}( {\bar{A}}).\)

We must now distinguish between two cases:

  • Case 1 \(A_{2}=A^{mon}:\) firm 2 will clearly never set \( A_{2}>A^{mon}.\) It might therefore be the case that firm 2 sets \( A_{2}=A^{mon}\) even if it could win the access contract with higher values of \(A_{2}.\) If this is true, firm 3 will obtain a strictly higher profit if it signs an access contract with firm 2 than with firm 1 (\(\pi _{32}=\Pi _{32}>\Pi _{31}({\bar{A}})\)).

Inserting \(A_{2}=A^{mon}\equiv 5t/18\) into (12) we find

$$\begin{aligned} \pi _{12}^{mon}=\frac{49}{432}t,~\pi _{22}^{mon}=\frac{23}{216}t,~\pi _{32}^{mon}=\frac{1}{432}t. \end{aligned}$$
(18)

This is only possible when \(\Pi _{31}({\bar{A}})<\frac{1}{432}t.\) If not, we are in case 2.

  • Case 2 \(A_{2}({\bar{A}})<A^{mon}:\) Operating profits for the firms are then

    $$\begin{aligned} \pi _{12}= & {} \frac{1}{27}t+A_{2}({\bar{A}})\frac{20t+27A_{2}({\bar{A}})}{100t},\quad \pi _{22}=\frac{1}{27}t+A_{2}({\bar{A}})\frac{5t-9A_{2}({\bar{A}})}{10t}, \nonumber \\ \end{aligned}$$
    (19)
    $$\begin{aligned} \ \pi _{32}= & {} \frac{1}{27}t-A_{2}({\bar{A}})\frac{20t-27A_{2}({\bar{A}})}{100t}. \end{aligned}$$
    (20)

    The reason why \(A_{2}({\bar{A}})<A^{mon}\) is that firm 3 will sign an access contract with firm 1 if firm 2 tries to set a higher value of \(A_{2}({\bar{A}} ).\) In other words, we must have \(\pi _{32}=\Pi _{31}.\) Solving this equation implies that

    $$\begin{aligned} A_{2}({\bar{A}})=\frac{10}{27}t-\frac{10}{9}\sqrt{3t\Pi _{31}({\bar{A}})}~(\text { with }s_{2}=A_{2}\text { and}~w_{2}=0). \end{aligned}$$
    (21)

Summing up \(A_{2}({\bar{A}})=\min \left\{ \frac{10}{27}t-\frac{10}{9}\sqrt{ 3t\Pi _{31}({\bar{A}})},A^{mon}\right\} .\)

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Arve, M., Foros, Ø. & Kind, H.J. Access price structure and entrant build-or-buy incentives in mobile markets. J Regul Econ 61, 67–87 (2022). https://doi.org/10.1007/s11149-021-09442-3

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