Discussion Papers

Ingo Vogelsang
(Department of Economics, Boston University. This Discussion paper is a slightly revised version of an expertise the author carried out for the Monopoly Commission.)

Resale und konsistente Entgeltregulierung
Nr. 269 / Oktober 2005

Summary

Resale obligations in the German telecommunications sector are a new regulatory instrument, the advantages and disadvantages of which have to be established in actual situations. In any case, the resale provisions of the German Telecommunications Law of 2004 (TKG) clearly arrive too late. Resale obligations will therefore hardly be able to fulfill their task of leading into infrastructure investments of new competitors. On top of that, retail telephone access, which should be the most suitable service for resale obligations, has been excluded from obligations until 2008. Efficiently regulated resale obligations are generally not in conflict with efficient infrastructure competition. In particular, an efficiently implemented resale obligation should generally not endanger existing infrastructure investments because resale does not increase total market supply while enhancing demand (with some probability).

In order to be a suitable obligation resale has to be superior to alternative remedies or complement them so that competitive results improve. Competitive problems to be solved through resale obligations are characterized by severely curtailed infrastructure competition or the danger of leveraging market power onto markets with (almost) effective infrastructure competition. Completely new markets are to be exempt initially from regulation. In case no effective competition emerges at a later point in time, resale obligations are superior to other remedies in new markets and in the presence of innovations, because they can be introduced quickly and, provided wholesale rebates are set correctly, do not interfere with the incumbent’s (innovative) investments.

In contrast to other types of wholesale access resale obligations are overwhelmingly priced under the retail-minus approach. In the simplest case of the so-called margin rule this results in a wholesale rebate on the incumbent’s resale price equaling the incumbent’s avoided costs. However, under pure resale the margin rule does not prevent the exercise of downstream monopoly power by the incumbent. In contrast, resale based on the incumbent’s cost of service provision enables an abolishment of end-user price regulation, even in the absence of infrastructure competition. According to the relevant section of the TKG the wholesale price shall simultaneously (a) allow an efficient reseller to make a reasonable profit and (b) cover the cost of efficient provision of the service. These two criteria can be incompatible, something for which the TKG offers no solution.

According to the ladder-of-investment model of market entry in telecommunications resale fits best at the beginning of market liberalization as a "bridge" for climbing the step of infrastructure investment. Applied to resale the ladder hypothesis means that resale should predominantly be applied for services, where infrastructure investments of competitors are lacking. This holds particularly for persistently non-replicable services such as unbundled access services, for geographically remote services and as a first remedy for new services.

Policy consequences of the analysis particularly concern the efficient setting of wholesale prices, the belated provision of resale for unbundled telephone access, the reduction of other regulatory interventions in exchange for resale obligations and the requirement of the TKG that the regulator shall consider the effect of a resale obligation on past and future investments for innovative services. [Full text available in German only]

Diskussion Paper is available for download.

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