Is Functional Separation the Right Policy Remedy to Break Telecommunications Monopoly and Improve Performance?

Abstract

How to break fixed network monopoly and increase competition is a grinding yet controversial topic for the telecommunications sector. In the past two decades, functional separation between wholesale network and retail service was brought to the table by countries intended to promote a healthier telecommunications market. It was first implemented in the United Kingdom in 2005 and we have witnessed many other OECD countries follow suit. However, until now, there is still no empirical evidence on the effectiveness of this solution. This paper aims to fill this gap by using country-level panel data covering the period from 2002 to 2016 to empirically evaluate the impacts of functional separation on fixed telecommunications market using different estimation methods. Our results show that functional separation does not cause any negative impacts as some previous literatures concerned. Instead, it stimulates healthy development of fixed broadband market by significantly decreasing price level and significantly upgrading network quality. After controlling for endogeneity, our findings are still robust, in addition, our results also reveal that impacts of functional separation are related to the degree of functional separation. A higher degree of functional separation results in more positive performance of fixed broadband market.