“Build-or-Buy” Strategies in the Local Loop

Abstract

The nature of competition in local access telecommunications networks is shaped by the "build-or-buy" decisions of the competitive local exchange carriers (CLECs). Facility-based competition takes place when a CLEC "builds" its own infrastructure (e.g., wireless local loop, cable network, fiber-optic network, satellite network), whereas service-based competition takes place when a CLEC "buys" some network elements from the incumbent local exchange carrier (ILEC). Two main ways to achieve servicebased competition are resale and local-loop unbundling. 1 A serious concern with mandatory local-loop unbundling is that it may undermine incentives for facility-based competition. 2 In order to achieve transition to facility-based competition, Jerry A. Hausman and J. Gregory Sidak (2004) suggest that regulators allow the prices for fixed unbundled elements to increase over time, while Thomas Jorde et al. (2000) suggest that mandatory unbundling should sunset after the passage of two years or upon the entry of a facility-based competitor.In this paper, we challenge the implicit assumption behind sunset clauses, 3 namely that the ILEC would either deny unbundling or charge too high a price for its network elements in the absence of regulation. We do this by analyzing an unregulated ILEC's decision regarding unbundling in an unregulated environment. 4 We make the realistic assumption that the cost of building the facility declines over time. In a dynamic setting we show that an unregulated incumbent sets a rental path for its local loop, which delays facility-based entry, compared to the case in which there is no unbundling. The equilibrium rental path set by the unregulated incumbent is prohibitively high at the initial phases when there is no effective threat of facility-based entry, and it is decreasing over time during later phases following the rise of the entrant's opportunity cost of leasing lines. We argue that neither allowing higher prices for unbundled elements over time nor setting a sunset clause would suffice to induce facility-based competition. The ILECs that initially resist unbundling requirements will tend to charge attractive access prices (relative to the CLECs' alternatives) for their infrastructure, which become less essential over time. Therefore, the appropriate policy for regulators is to commit to ban unbundled access when facilitybased entry becomes feasible and socially desirable.

Tariff diversity and competition policy: drivers for broadband adoption in the European Union

“…The results suggest that tariff diversity exerts a positive impact on demand in countries with a distinct level of facility-based competition, falsifying the hypothesis that a trade-off between competition and tariff diversity exists. The European Commission's intention to cut down the regulation on unbundled access and to promote facility-based competition seems therefore to be the appropriate policy for regulators (see, also Bourreau and Doğan, 2006).…”

Facility- and service-based competition and investment in fixed broadband networks: Lessons from a decade of access regulations in the European Union member states

“…Guthrie (2006) and Bourreau and Dogan (2006) emphasize that the ex ante regulated incumbent is exposed to a considerable risk, while the entrant has secondmover advantage due to the investment flexibility available in terms of exploiting new technologies. Innovations, such as xDSL technologies, enable the entrant to offer new products or higher quality services without facing the risk due to demand-side uncertainties.…”

Access regulation and geographic deployment of a new generation infrastructure

“…In this field, Bourreau and Dogan [2005] show that it can be profitable for incumbents to set a low access charge in order to reduce the entrants' incentives to invest. Consequently, if FBC is considered socially desirable, the access charge must be set at a high enough level by the regulator.…”

“…In a second step, the NRA increases the access charge in order to persuade the new operators to "climb" the ladder of investment by deploying their own infrastructures. Avenali et al [2010] made a contribution to this literature by focusing on the first step of the investment ladder: They assume that rather than being unavoidable (as in Bourreau and Dogan, 2005), deployment of the new entrant's own infrastructure depends on its capacity to build a customer base, which will increase its reputation and brand loyalty, and on the access policy. Like Bourreau and Dogan, 2005, Avenali et al conclude that access charges should increase over time in order to incite competitors to climb the investment ladder.…”