Platform regulation in
other industries:
Lessons from telecoms
Tommaso Valletti
Imperial College London, Telecom
TOMMASO VALLETTI
Invisible prices (to us)
 Interconnection between
telecommunications networks
 Call termination is one of the most
important interconnection services
 Interconnection prices are “invisible” to
us, but affect competition and,
ultimately, the tariffs we pay
TOMMASO VALLETTI
Very interesting findings
 Competitive “bottlenecks”
 Some prices are “monopolised”
 “Two-sided” markets (platforms) and
skewed pricing structures
 Policy question: intervene to achieve
efficiency (regulation vs. competition
policy)
General features of 2SM
 Relative prices versus rents
 General problem that applies to many
situations
 Two ways of looking at this problem:
– Even under perfect competition, a 2SM
carries inefficiencies
– Intervention typical of 1SM does not
work in 2SM
TOMMASO VALLETTI
Fallacies in 2SM
 (LR)IC = efficient?
 Individual mark-ups indicate market
power?
 More competition implies a more
balanced price structure?
 Removal of cross-subsidies will benefit
the side that pays above (LR)IC?
TOMMASO VALLETTI
The “waterbed” effect
Mobile telephony largely unregulated,
with the important exception of Mobile
Termination Rates (MTR)
Mobile customers bring a “termination
rent”
Competition for customers might
exhaust this rent
Justification for regulatory intervention to
cut MTR -> BUT this can potentially
increase prices for mobile subscribers
TOMMASO VALLETTI
Genakos and Valletti (JEEA, 2011)
 Is there a waterbed effect?
–MTR down -> retail prices up?
 Is it “full”?
–Sector fully competitive, so just a rebalancing
of structure of prices?
–Or market power, so negative impact on
operators’ profits?
 Empirical strategy
–Exploit differential regulation between
countries and, within countries, between
TOMMASO VALLETTI
Average Price Around the
Introduction of Regulation
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Evolution of the waterbed effect
(post-paid)
TOMMASO VALLETTI
Evolution of the waterbed effect
(pre-paid)
TOMMASO VALLETTI
Main results, and why do we care
 Waterbed effect strong and significant (-10% in
MTR -> +5% in bill)
 Effect diluted for pre-paid consumers, where
regulation counteracts the “collusive” effect of
access charges
 Magnitude of the waterbed effect key to assess
costs and benefits of regulation of termination
charges (externalities and elasticities)
 Implications for the current regulation of
TOMMASO VALLETTI
Static - What about investments
 Another hot topic is “net neutrality”
 Concern: technology allows Internet
Service Providers (ISPs) to discriminate
between data packets quite easily
 Regulate the internet to preserve
openness and neutrality?
 Leave the internet free to develop
TOMMASO VALLETTI
according to market forces?
Net neutrality
 (Non-academic) debate can be summarised as
follows:
– CEO of AT&T (ISP): “Now what they would like to do is use
my pipes free, but I ain't going to let them do that. We have
spent this capital and we have to have a return on it”
– Google (CP) affidavit to FCC: “The Internet is awesome, let’s
keep it that way!”
 Economic models to analyze the tension
between content innovation and network
expansion to avoid congestion: edge vs. core
TOMMASO VALLETTI