Discussion Papers

Ulrich Stumpf

The definition of subnational markets as a regulatory approach

No. 334 / March 2010


The discussion paper addresses the pros and cons of partially deregulating wholesale telecoms services based on subnational market definitions. Deregulation of an urban wholesale market is justifiable both on regulatory and economic grounds if the improvement of competitive conditions is sustainable and any required complementary regulatory measures on corresponding wholesale and retail markets are practicable and feasible. Indeed, a number of developments seem to justify a partial deregulation of wholesale broadband access in urban areas. Competitive conditions have improved as, besides the incumbent, a number of other vertically integrated networks operators offer broadband Internet access (unbundlers, cable operators) and, in some countries, also wholesale broadband access (unbundlers). At the same time, the market share of incumbents in broadband Internet access has significantly decreased. However, there are also a number of concerns which become visible once the analysis is broadened: First, partial deregulation of wholesale broadband access may require a shift in the regulatory paradigm, since only a regionalisation of ex ante regulation along the whole value chain may prevent margin squeezes. Such margin squeezes could emerge if, in fact, the urban wholesale broadband access market was characterised by intensive competition between several suppliers of wholesale broadband access, in other words: if regulation was not abandoned simply because wholesale broadband access lost its significance for competition at the retail level as a result of the existence of several vertically integrated networks (e.g., unbundlers, cable operators). Second, a partial deregulation would neglect special markets, on which competition is much more dependent on wholesale broadband access as this is the case for the mass market for broadband Internet access. This is particularly true for the provision of connectivity to business customers with multiple sites. Competition problems can occur if partial deregulation results in a price increase and quality deterioration for wholesale broadband access products provided to suppliers on this market. Third, the current improvement of competitive conditions in urban areas, in most countries, depends on the presence of operators, which use the unbundled local loop of incumbents. The business model of these operators will be put into question by migration of incumbents to Next Generation Networks, so that the current improvement of competitive conditions do not appear to be sustainable in the longer run, and a partial deregulation would be have to reversed in the next market review. The discussion paper concludes that the definition of subnational markets as a regulatory approach for wholesale broadband access does not seem to be a feasible approach in most countries.

(Full version only available in German language)

Discussion Paper is available for download.

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