Skip to main content
SpringerLink
Log in

Dark fiber price regulation in the absence of facilities-based competition

  • Published:
Economia e Politica Industriale Aims and scope Submit manuscript

Abstract

Contrary to copper, fiber is a segmented vital input. This means that, even though a National Regulatory Authority may regulate active fiber, the owner of the fiber network infrastructure may distort retail competition and obtain a sufficiently high wholesale revenue through the sale of dark fiber if this is not subject to regulatory intervention. Given the recent trend in favor of access price regulation of dark fiber in Europe, the analysis evaluates which wholesale price control method should be applied considering that the market structure of the telecommunications industry is the monopolistic bottleneck. Three regulatory options are tested against each other: active-minus regulation, cost-based regulation applied to both layers of the segmented vital input and equivalence of inputs. The imposition of active-minus regulation improves investment incentives and social welfare compared to the alternative methods.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8

Similar content being viewed by others

Notes

  1. As explained and demonstrated in Brito and Tselekounis (2017)’s analysis, the trade-off between static and dynamic efficiency may be solved because the profit of the service-based entrant may increase (decrease) as the wholesale access price charged by the incumbent increases (decreases), respectively. The immediate effect of this mechanism is the higher investment realization. Moreover, the gain in producer surplus outweighs the loss in consumer surplus such that social welfare increases.

  2. In light of the above categorization regarding the different types of access obligations, regulation of the price of dark fiber should be understood, similarly to the price of access to the ducts, as a form of intervention at a lower layer of the value chain because, by definition, dark fiber is an inactive element of the fiber circuit. Hence, regulation of the price of dark fiber corresponds to a regulatory intervention at the passive layer of the incumbent’s fiber network. See the Online Appendix for a detailed clarification.

  3. This point is clarified through the analysis of the unregulated dark fiber regime relegated to the Online Appendix. Moreover, common carriage laws and supervision of the passive access price are gaining increasing strength. See the Online Appendix for a detailed clarification.

  4. It is mandatory understand that regulation of the price of dark fiber differs from regulation of the price of access to the ducts. We focus on the first type of regulation. We exogenously assume that the price of access to the ducts is set at marginal cost level which, in turn, is normalized to 0. This assumption is verified in European jurisdictions whose deployment of NGA networks is more advanced (e.g., Portugal). The second type of regulation goes beyond the scope of this study.

  5. On the one hand, cases \(0<1/2<\rho <\tau \le 1\) and \(0<1/2<\tau <\rho \le 1\) seem unlikely since the other licensed operator would use most of the active and passive fiber. On the contrary, under cases \(0<\rho<\tau<1/2<1\) and \(0<\tau<\rho<1/2<1\) the incumbent’s subsidiary would use most of the active and passive fiber which would reinforce the incumbent’s market power, thus, constituting a case study with little interest since both layers of the segmented vital input would be subject to marginal cost pricing.

  6. Since the investment cost function has a quadratic and convex specification, quality underprovision is emaciated as we move towards rural regions.

  7. On the one hand, this consideration reflects that the development infrastructure phase is influenced by the allocation infrastructure phase under active-minus regulation and cost-based regulation applied to both layers of the segmented vital input. On the other hand, the other licensed operator is always excluded from retail market when both regimes are implemented. In the Online Appendix, we demonstrate that such an exclusionary behavior is valid for a broader range of parameters’ space in which \(\rho =0\) and \(\tau =1\) are included. In particular, we confirm that the other licensed operator is always excluded from retail market as long as:

    • the fraction of active fiber sold to the other licensed operator is sufficiently low

      $$\begin{aligned} \rho \in \left[ 0,\dfrac{1}{2}-\frac{\gamma (3-\beta )}{4\beta ^{2}}\right] , \end{aligned}$$

    • for any given sufficiently high fraction of dark fiber sold to the other licensed operator

      $$\begin{aligned} \tau \in \left( \dfrac{1}{2},1\right] . \end{aligned}$$

    This result implies that the conclusions obtained for the analysis developed under the restrictions \(\rho =0\) and \(\tau =1\) are qualitatively valid for a broader range of parameters’ space. Thus, we have full legitimacy to impose \(\rho =0\) and \(\tau =1\) without loss of generality (w.l.o.g.), thus, keeping the qualitative nature of the main results beyond doubt. Imposing \(\rho =0\) and \(\tau =1\) heavily simplifies computations that are already sufficiently complex per se.

  8. Since demand is not dependent on \(\lambda\), the regulatory intervention on the infrastructure allocation phase under equivalence of inputs not only influences but also turns the infrastructure development phase irrelevant.

  9. In addition, strategic effects between wholesale market and retail market can be even more complex if we take into account that there may not exist a complementary relationship between quality of service and retail price, for instance, due to the adoption of penetration pricing strategies or personalized bundles by the owner of segmented vital input in the retail market. This implies that even if a study that adopts a general specification for retail demand may generate biased results because, in spite of the generality, quality of service and retail price may be strategic substitutes. In this sense, any research can be subject to criticism.

  10. The definition of active access price follows the cost-based principle of Sarmento and Brandão (2007) who have applied this methodology in the context of copper. The main difference is that, in the NGA framework, active access price only reflects the cost structure of the active elements of the fiber network infrastructure. Otherwise, if incorporating the passive cost structure, active access price would be too high. Obviously, a leveraged active access price would reflect a wrong evaluation of the active network infrastructure.

  11. Assumption 1 has a twofold interpretation. From the mathematical point of view, the concavity of investment cost function is neither too smooth nor too steep. From the economic point of view, the investment effort is neither too low nor too high, otherwise, an equilibrium fails to exist once introducing passive access price regulation.

  12. Where superscript AMR denotes ex-ante active-minus regulation regime.

  13. Formally

    $$\begin{aligned} \frac{\partial q_{I}}{\partial x_{I}}:=\frac{\beta (3\lambda -1)}{3}>0,\quad \forall \lambda ^{AMR*}\in \left( \frac{2}{3},1\right] , \end{aligned}$$

    while

    $$\begin{aligned} \frac{\partial q_{E}}{\partial x_{I}}:=\frac{\beta (2-3\lambda )}{3}<0,\quad \forall \lambda ^{AMR*}\in \left( \frac{2}{3},1\right] . \end{aligned}$$

  14. For instance, the incumbent may have incentive to define low physical equipment costs or low amount of active input to decrease the active-minus discount in order to set passive access price at sufficiently high level thereby decreasing the wholesale price gradient, i.e. the difference between active and passive access price. The reader can easily observe that the investment cost formulas are not subject to bias. Under active-minus regulation, active fiber acts as anchor of the passive access price, thus, transparency and confidence only must prevail in the active layer of the segmented vital input. However, under cost-based regulation applied to both layers of the segmented vital input, transparency and confidence must be extended from the active to the passive layer of the segmented vital input.

  15. See the Online Appendix for a detailed clarification.

  16. Where superscript CBR denotes ex-ante cost-based regulation regime.

  17. Where superscript EoI denotes equivalence of inputs. Note that this regime holds for \(\gamma >\beta ^{2}/8\), which is a parameter space less stringent than Assumption 1.

  18. Note that

    $$\begin{aligned} \left\{ \begin{array}{c} w^{P*,CBR}<w^{P*,EoI};\\ w^{P*,CBR}\ge w^{P*,EoI}; \end{array} \right. \Leftrightarrow \left\{ \begin{array}{c} \gamma \in \left( \widetilde{\gamma },\dfrac{2\beta ^{2}}{3}\right] ;\\ \gamma \in \left( \dfrac{2\beta ^{2}}{9},\widetilde{\gamma }\right] , \end{array} \right. \end{aligned}$$
    $$\begin{aligned} {\text {with }}\,\widetilde{\gamma }:=\frac{\beta ^{2}\left\{ 39-\lambda (9+6\beta )+\sqrt{1089-3\lambda \left[ 90-27\lambda +128\beta -4\beta \lambda (2+3\beta )\right] }\right\} }{3(36-7\beta \lambda )}\quad \text { and }\quad \frac{\partial \widetilde{\gamma }}{\partial \lambda }<0. \end{aligned}$$

    Furthermore, wholesale price gradient \(w^{A*,i}-w^{P*, i}\) is positively related with ratio

    $$\begin{aligned} \widetilde{w}^{i}:=\dfrac{w^{A*,i}}{w^{P*,i}},\quad i=\{AMR,CBR,EoI\}. \end{aligned}$$

  19. Note that

    $$\begin{aligned} \frac{\partial w^{A*,CBR}}{\partial \gamma }\,\lessgtr\, 0\Leftrightarrow \gamma \,\lessgtr\, \widetilde{\widetilde{\gamma }}:=\frac{2\beta ^{2}\left( 3-\beta +\sqrt{6}\sqrt{6-\beta }\right) }{27-\beta ^{2}}, \end{aligned}$$

    where \(\widetilde{\widetilde{\gamma }}\) corresponds to the minimum of \(w^{A*,CBR}\) since

    $$\begin{aligned} \left. \frac{\partial ^{2}w^{A*,CBR}}{\partial \gamma ^{2} }\right| _{\gamma =\widetilde{\widetilde{\gamma }}}>0. \end{aligned}$$

    The expression ‘over time’ means as \(\gamma\) moves from the extreme \(2\beta ^{2}/3\) to the extreme \(2\beta ^{2}/9,\) thus, each curve exposed in Fig. 2 should be analyzed from the right to the left extreme of \(\gamma\)’s domain.

  20. An unsuccessful entry is verified due to the ex-post adjustment in the incumbent’s network topology, and not because of a wrong definition of the wholesale price gradient. A statutory duty considered transversal to all national regulatory authorities is the promotion of competition. This is achieved by disseminating the use of dark fiber at an affordable price because the replication of a competitive market in the passive layer requires passive access price oriented to marginal cost.

  21. Similar applies to passive fiber given the assumption of input substitutability. Computations show that both wholesale price control methods imply \(\partial \lambda ^{i*}/\partial \gamma >0\) and \(\partial \lambda ^{i*}/\partial \beta <0\), \(i=\{CBR,\) \(AMR\}.\) Needless to say, \(\lambda ^{EoI*}\) can take any value between 0 and 1.

  22. When consumers observe a systematic price increase over time, they learn the strategic behavior of downstream operators and, thus, tend to attribute more relevance to retail price and less relevance to quality of service. The rigidity of the retail demand curve is softened, thus, it becomes flatter (Ribeiro 2017). Although our analysis does not capture this effect because retail demand is assumed linear, we have clarified such a limitation in the ‘Model’ section and we have explained the implication of introducing a more elastic retail demand: the regulator is expected to impose passive access price at marginal cost level, regardless of the regulatory regime adopted.

  23. Note that

    $$\begin{aligned} \left\{ \begin{array}{c} PS^{EoI*}<PS^{CBR*};\\ PS^{EoI*}\ge PS^{CBR*} \end{array} \right. \Leftrightarrow \left\{ \begin{array}{c} \gamma \in \left( \widehat{\gamma },\dfrac{2\beta ^{2}}{3}\right] ;\\ \gamma \in \left( \dfrac{2\beta ^{2}}{9},\widehat{\gamma }\right] , \end{array} \right. \end{aligned}$$

    with \(\widehat{\gamma }\) representing the break-even point between \(PS^{EoI*}\) and \(PS^{CBR*}\).

  24. The exception holds for \(\gamma =2\beta ^{2}/3\), that is, when investment effort is excessively high, i.e. in the early rollout of fiber network infrastructure. The regulator is indifferent between active-minus regulation and cost-based regulation applied to both layers of the segmented vital input, hence, active-minus regulation is still socially desirable.

References

  • Arrow, K. (1962). Economic welfare and the allocation of resources for invention. In The rate and direction of inventive activity: Economic and social factors (pp. 609–626). Princeton: Princeton University Press.

    Google Scholar 

  • Avenali, A., Matteucci, G., & Reverberi, P. (2010). Dynamic access pricing and investment in alternative infrastructures. International Journal of Industrial Organization, 28(2), 167–175.

    Article  Google Scholar 

  • Bourreau, M., & Doğan, P. (2004). Service-based vs. facility-based competition in local access networks. Information Economics and Policy, 16(2), 287–306.

    Article  Google Scholar 

  • Bourreau, M., & Doğan, P. (2005). Unbundling the local loop. European Economic Review, 49(1), 173–199.

    Article  Google Scholar 

  • Bourreau, M., & Doğan, P. (2006). “Build-or-buy” strategies in the local loop. American Economic Review, 96(2), 72–76.

    Article  Google Scholar 

  • Bourreau, M., Doğan, P., & Manant, M. (2010). A critical review of the “ ladder of investment” approach. Telecommunications Policy, 34(11), 683–696.

    Article  Google Scholar 

  • Bourreau, M., Cambini, C., & Doğan, P. (2012a). Access pricing, competition, and incentives to migrate from “ old” to “ new” technology. International Journal of Industrial Organization, 30(6), 713–723.

    Article  Google Scholar 

  • Bourreau, M., Cambini, C., & Hoernig, S. (2012b). Ex-ante regulation and co-investment in the transition to next generation access. Telecommunications Policy, 36(5), 399–406.

    Article  Google Scholar 

  • Bourreau, M., Cambini, C., & Doğan, P. (2014a). Access regulation and the transition from copper to fiber networks in telecoms. Journal of Regulatory Economics, 45(3), 233–258.

    Article  Google Scholar 

  • Bourreau, M., Lupi, P., & Manenti, F. M. (2014b). Old technology upgrades, innovation, and competition in vertically differentiated markets. Information Economics and Policy, 29, 10–31.

    Article  Google Scholar 

  • Bourreau, M., Cambini, C., & Hoernig, S. (2015). Geographic access markets and investments. Information Economics and Policy, 31, 13–21.

    Article  Google Scholar 

  • Briglauer, W., Frübing, S., & Vogelsang, I. (2014). The impact of alternative public policies on the deployment of new communications infrastructure—A survey. Review of Network Economics, 13(3), 227–270.

    Article  Google Scholar 

  • Briglauer, W. (2015). How EU sector-specific regulations and competition affect migration from old to new communications infrastructure: Recent evidence from EU27 member states. Journal of Regulatory Economics, 48(2), 194–217.

    Article  Google Scholar 

  • Briglauer, W., Cambini, C., & Grajek, M. (2015). Why is Europe lagging on next generation access networks. Bruegel Policy Contributions, 14, 1–13.

    Google Scholar 

  • Brito, D., Pereira, P., & Vareda, J. (2012). Incentives to invest and to give access to non-regulated new technologies. Information Economics and Policy, 24(3), 197–211.

    Article  Google Scholar 

  • Brito, D., & Tselekounis, M. (2017). On the impact of input prices on an entrant’s profit under multi-product competition. Review of Industrial Organization, 50(1), 105–125.

    Article  Google Scholar 

  • Cave, M. (2006). Encouraging infrastructure competition via the ladder of investment. Telecommunications Policy, 30(3), 223–237.

    Article  Google Scholar 

  • Cave, M. (2010). Snakes and ladders: Unbundling in a next generation world. Telecommunications Policy, 34(1), 80–85.

    Article  Google Scholar 

  • Cave, M. (2014). The ladder of investment in Europe, in retrospect and prospect. Telecommunications Policy, 38(8), 674–683.

    Article  Google Scholar 

  • Cambini, C., & Jiang, Y. (2009). Broadband investment and regulation: A literature review. Telecommunications Policy, 33(10), 559–574.

    Article  Google Scholar 

  • Dobbs, I. M. (2015). Ladder pricing—A new form of wholesale price discrimination. International Journal of the Economics and Business, 22(1), 1–21.

    Article  Google Scholar 

  • Dertwinkel-Kalt, M., Haucap, J., & Wey, C. (2016). Competitive dual pricing. European Journal of Law and Economics, 41, 537–557.

    Article  Google Scholar 

  • EC (European Commission) (2010). European Commission Recommendation on regulated access to Next Generation Access Networks (NGA). Official Journal of the European Communities, L251, 35–48.

    Google Scholar 

  • EC (European Commission) (2013). European Commission Recommendation on consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment. https://ec.europa.eu/digital-single-market/en/news/commissionrecommendation-consistent-non-discrimination-obligations-and-costing-methodologies. Accessed 15 Jan 2017.

  • EC (European Commission) (2014). Trends in European broadband markets 2014. Retrieved from: https://ec.europa.eu/digital-single-market/en/news/scoreboard-2014-trends-european-broadband-markets-2014.

  • EC (European Commission) (2016). European Commission Decision concerning Case UK/2016/1849. Retrieved from: https://circabc.europa.eu/sd/a/e9fad411-dde9-42b0-8857-3ed159e3058d/UK-2016-1849%20Adopted.pdf.

  • FCC (Federal Communications Commission) (2010). In the matter of schools and libraries universal service. Retrieved from: https://apps.fcc.gov/edocs_public/attachmatch/FCC-10-175A1.pdf.

  • FCC (Federal Communications Commission) (2014). In the matter of modernizing the E-rate program for schools and libraries. Retrieved from: https://apps.fcc.gov/edocs_public/attachmatch/FCC-14-189A1.pdf.

  • FCC (Federal Communications Commission) (2015). In the matter of protecting and promoting the open Internet. https://apps.fcc.gov/edocs_public/attachmatch/FCC-15-24A1_Rcd.pdf. Accessed 15 Jan 2017.

  • Foros, Ø. (2004). Strategic investments with spillovers, vertical integration and foreclosure in the broadband access market. International Journal of Industrial Organization, 22(1), 1–24.

    Article  Google Scholar 

  • Höffler, F., & Kranz, S. (2011). Legal unbundling can be a golden mean between vertical integration and ownership separation. International Journal of Industrial Organization, 29(5), 576–588.

    Article  Google Scholar 

  • Inderst, R., & Peitz, M. (2012). Market asymmetries and investments in next generation access networks. Review of Network Economics, 11(1). doi:10.1515/1446-9022.1323.

  • Malueg, D. A. (1994). Monopoly output and welfare: The role of curvature of demand function. Journal of Economic Education, 25(3), 235–250.

    Article  Google Scholar 

  • OFCOM (Independent Regulator and Competition Authority for the UK Communications Industries) (2015). Review of competition in the provision of leased lines. Retrieved from: http://stakeholders.ofcom.org.uk/binaries/consultations/bcmr-2015/summary/BCMR_Sections.pdf.

  • PTS (National Post and Telecom Agency of Sweden) (2008). Dark fiber—Market and state of competition. Retrieved from: https://www.pts.se/upload/Rapporter/Tele/2008/dark-fiber-2008-9-june-08.pdf.

  • Rey, P., & Tirole, J. (2007). A primer on foreclosure. Handbook of Industrial Organization, 3, 2145–2220.

    Article  Google Scholar 

  • Ribeiro, V. M. (2017). Flexibility in the European telecommunications industry. Digital Policy, Regulation and Governance, 19(5), 1–15. doi:10.1108/DPRG-04-2017-0016.

    Article  Google Scholar 

  • Sarmento, P., & Brandão, A. (2007). Access pricing: A comparison between full deregulation and two alternative instruments of access price regulation, cost-based and retail-minus. Telecommunications Policy, 31(5), 236–250.

    Article  Google Scholar 

  • Schumpeter, J. (1942). Capitalism, socialism and democracy. New York: Harper Press.

    Google Scholar 

  • Spence, A. M. (1975). Monopoly, quality, and regulation. Bell Journal of Economics, 6(2), 417–429.

    Article  Google Scholar 

  • Tirole, J. (1988). The theory of industrial organization. Cambridge: MIT University Press.

    Google Scholar 

  • Tselekounis, M., Varoutas, D., & Martakos, D. (2014). A CDS approach to induce facilities-based competition over NGA networks. Telecommunications Policy, 38(3), 311–331.

    Article  Google Scholar 

  • Vogelsang, I. (2013). The endgame of telecommunications policy? A survey. Review of Economics, 64(3), 193–270.

    Article  Google Scholar 

  • Vogelsang, I. (2015). Will the US and EU telecommunications policies converge? A survey. Economia e Politica Industriale, 42(2), 117–155.

    Article  Google Scholar 

Download references

Acknowledgements

The work was supported by ANACOM through Post-Doctoral Grant ref. 02 2014 DAC-AE. The views expressed in the paper are exclusively of the author, thus, not representing the view of ANACOM or BEREC. Vitor Miguel Ribeiro appreciates the valuable comments and discussions provided by two anonymous referees and the suggestions made by the Editor-in-Chief Carlo Cambini. These have drastically improved the quality of the manuscript, hence, my immeasurable gratitude goes to you. Finally, no conflict of interest is declared by the author.

Author information

Authors and Affiliations

  1. ANACOM, Autoridade Nacional de Comunicações, Avenida José Malhoa 12, 1099-017, Lisbon, Portugal

    Vitor Miguel Ribeiro

  2. Universidade de Aveiro, Campus Universitário de Santiago, DEGEIT, 3810-193, Aveiro, Portugal

    Vitor Miguel Ribeiro

Authors
  1. Vitor Miguel Ribeiro
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Vitor Miguel Ribeiro.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary material 1 (PDF 415 kb)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Ribeiro, V.M. Dark fiber price regulation in the absence of facilities-based competition. Econ Polit Ind 45, 243–278 (2018). https://doi.org/10.1007/s40812-017-0075-8

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40812-017-0075-8

Keywords

JEL Classification

Search

Navigation