Joint Session with Earie : Telecom. I – T1
T1.1 Jukka Liikanen: Helsinki School of Economics, Paul Stoneman: Warwick Business School, University of
Warwick, Otto Toivanen: Helsinki School of Economics
Intergenerational Effects in the Diffusion of new Technlogy:The Case of Mobile Phones
Many new technologies exhibit clear generational changes. The empirical literature on technology diffusion
traditionally analyses the spread of new technologies generically. We use data from the mobile phone industry, where
first-generation (1G) and second-generation technologies (2G) can be clearly identified, to analyse the role of
generational effects in diffusion. The results from a generation specific approach differ significantly from those of a
generic model. There are positive within-generation network effects. 1G (2G) has a positive (negative) effect on 2G
(1G) diffusion. Both generations are substitutes for fixed phones. Effects of competition and payment schemes are
also analyzed.
T1.2 Toker Doganoglu: University at Kiel, Lukasz Grzybowski: University at Kiel, Germany
Diffusion of Mobile Phones in Germany: a Network Effects Approach
We analyze the diffusion of mobile phones in Germany using publicly available data in the period January 1997 and
September 2001. During the period, prices have fell about 50% while the subscriber base have grown 870%. Our
hypothesis is that prices alone cannot account for this immense growth rate alone, therefore we estimate a structural
model of demand and supply taking into account network effects. Our preliminary results imply the existence of
strong network effects. Moreover, the data is best explained by means of an S-shaped network benefit function in
contrast to the theoretical favorite concave.
T1.3 Heli Koski: London School of Economics, Tobias Kretschmer: London School of Economics, UK
Entry, Standards and Competition: Firm Strategies and the Diffusion of Mobile Telephony
This paper identifies determinants of 2G mobile telephony diffusion. Using a nine-year panel, we examine the effect
of intensity and form of competition on diffusion and firm strategies. We show that within-firms and within-standards
competition affect mobile providers’ strategies and consequently the evolution of 2G telephony. We also study the
role of institutional differences and network externalities on wireless diffusion. We model three interlinked decisions:
First, we identify determinants of 2G introduction. We then determine supply and demand parameters by estimating
pricing and diffusion outcomes. We find that factors like standardization and competitive parameters influence the
decisions asymmetrically.
Joint Session with Earie : Telecom. II – T2
T2.1 Tommaso M. Valletti: Imperial College Management School, Carlo Cambini: Politecnico di Torino, Italy
Investments and Network Competition
This paper analyzes the incentives that operators have to invest in facilities with different levels of quality. We show
that the incentives to invest are influenced by the way termination charges are set. When the quality of a network has
an impact on all calls initiated by own customers, we obtain a result of “tacit collusion” even in a symmetric model
with two-part pricing. Firms tend to underinvest in quality, and this would be exacerbated if they could negotiate
reciprocal termination charges above cost.
1
T2.2 Simona Fabrizi : GREMAQ, Université de Toulouse 1, Bruno Wertlen : CERGE - University of Prague
The Mobile Internet Dilemma: to Upgrade or not to Upgrade?
Different environments may affect the decision to upgrade or not upgrade the existing mobile networks. When all
consumers highly prefer the upgraded services both operators decide to upgrade their technology. When there is
heterogeneity over the consumers preferences either both operators stick to the old technology or both decide to
upgrade. If the passage to the new technology requires a sufficiently high fixed cost only one operator upgrades when
the other doesn’t and vice versa. Finally, when this fixed cost can be shared between the operators through some
roaming agreement the existence of alternative equilibria can be also proved.
T2.3 Marc Bourreau : ENST, Paris, Pinar Dogan ; GREMAQ, Université de Toulouse 1
Unbundling the Local Loop
We study competition for high bandwidth services in the telecommunications industry by introducing the possibility
of unbundling the local loop, where leased lines permit the entrant to provide services without building up its own
infrastructure. We use a dynamic model of technology adoption and study the incentives of the entrant to lease loops
and compete “service-based”, and/or to build up a new and more efficient infrastructure and compete “facility-based”,
given the rental price. We show that the incumbent sets too low a rental price for its loops; hence, the entrant adopts
the new technology too late from a social welfare perspective. The distortion may appear not only on the timing of
technology adoption but also on the type (quality) of the new technology to be adopted. We also show that while
regulating the rental price may suffice to achieve socially desirable outcomes, a sunset clause does not improve social
welfare.
Joint Session with Earie INTERNET III (Strategic Aspects) – I3
I3.1. Neus Palomeras i Vilches: Universitat Pompeu Fabra, Spain
Broad Patents: Do They Slow Down or Speed Up Technological Progress?
Patents over basic research are commonly regarded as blocking subsequent research. This paper shows this may not
be the case. If there is no market for intellectual property, broad patents will actually block innovation. However, if an
efficient global market for technology does exist, they will spread out innovation. The reason lies on the fact that they
can be licensed into multiple sectors. This paper argues that such market is likely to exist on the Internet. Since the
Internet substantially reduces search costs, intellectual property trade is likely to result far more profitable than it was
up to now.
I3.2 Gergely Csorba: Central European University, Budapest, Hungary
Read-Only Versions for Free and for Profit: Functional Quality
Discrimination of a Software Producing Monopoly
This paper analyzes a special quality discrimination policy of a software firm, which removes some functions of his
product and sells the damaged version at a lower price. Because of the network externality exerted by the users, the
firm may find it profitable to distribute the degraded version at zero price, these are the so called free read-only
versions. The paper derives the conditions for introducing the read-only version, and the conditions for selling it for
free with a continuum type of consumers. Welfare consequences are also examined, and it is shown that functional
versioning may result in a Pareto-improvement.
2
I3.3 Martin Bandulet: Universität Augsburg, Germany
Strategic Impacts of Technology Switch-Over: Who Benefits from Electonic Coordination?
The introduction of new production technologies may alter the firm’s strategy sets, as they are not able to commit
credibly to quantity strategies anymore. Mixed oligopoly markets may emerge, where some companies compete in
prices, while others adjust their quantities. Using an approach first published by Reinhard Selten (1971) and
developed further by Richard Cornes and Roger Hartley (2001), I calculate the Nash equilibrium of such an N-person
game in a linear specification. Then I discuss the strategic effect of a technology switch-over on market performance
and social benefit.
Joint Session with Earie INTERNET IV(Elektronic Markets) – I4
I4.1 Pedro P. Barros: Universidade Nova de Lisboa, Hans Jarle Kind: Institute for Research in Economics and
Business Administration, Lars Sørgard: Norwegian School of Economics and Business Administration
The Economics of Portals
We study a market where two competing portals on the Internet are financed by selling advertising banners to
producers that sell consumer goods through the Internet. There are three main lessons from the paper. First, we show
that competition between the portals implies that the equilibrium price of banners are actually higher and profits lower
the less dierentiated the portals are perceived to be. Second, we show that a vertical alliance between a portal and a
producer would be harmful for the participating firms if the portals are sufficiently close substitutes. Third, we show
that there is a prisoners’ dilemma when the portals are sufficiently close substitutes, where they end up in an
equilibrium with no vertical alliances and low profit.
I4.2 Nicolas Curien : CNAM, François Moreau : CNAM, France
The Introduction of Elelctronic Marketplaces with Product Differentiation
From a Hotelling spatial competition framework, we model the effect of the introduction of an electronic marketplace
on two regional markets that were previously monopolized by two firms. In both regions, consumers are
heterogeneous as regards their quadratic transportation costs. We analyze the welfare effects of the introduction of the
electronic marketplace. We establish, depending on absolute level of transportation costs as well as on their
heterogeneity, the conditions for the electronic marketplace to raise firms’ profit. We also show that this electronic
marketplace may benefit to consumers who do not purchase on-line. A by-product of the paper is to show that
coupling an on-line duopoly with two o-line local monopolies leads to interior equilibria in contradiction with the
maximum differentiation principle.
I4.3 George Norman: Tufts University, Lynne Pepall: Tufts University, USA
Versionin, Brand-Strechtching and the Evolution of E-Commerce Markets
When firms produce vertically differentiated products, a two-firm merger typically lead to a reduction in product
variety and higher product prices even when cost savings are substantial. This surprising outcome arises because the
merging firms have a strong incentive to eliminate one of the product lines. We show that our results obtain even
when allowing for post-merger entry. Our findings cast doubt on the view that significant cost-savings should justify
corporate acquisitions. The results also make clear that the nature of product differentiation is a crucial feature in
evaluating merger outcomes.
3
I4.4 Oystein Foros: Norwegian School of Economics and Business Administration
Price Competition and Interconnection Qulatity in the Market for Digital Network Services
We consider competition between two providers of digital network services. The services are horizontally
differentiated, and consumers' willingness to pay depends upon the compatibility between the two providers.
Asymmetry in size is often used as an explanation of why we see that competing providers do not agree upon
compatibility between their networks. In this paper we show that asymmetry in pricing mechanism can reduce the
providers' incentives to become compatible. In particular, we show that if one firm uses first-degree price
discrimination, while the rival sets a linear price, the degree of compatibility will be lower than if both firms use the
same pricing mechanism. When the pricing mechanisms are set endogenously by the firms, we show that both firms
prefer the combination of complete compatibility and linear pricing to all other possible outcomes as long as the cost
of compatibility is not too high.
Joint Session with Earie: Network Economics – NE1
NE1.1 Andrzej Baniak, Prof., CEU, Budapest, Hungary, Yuri Yegorov, Prof., CEU, Budapest, Hungary
Monopoly with Double Network Externality
The paper addresses the issue of double network externality that emerges in mobile phone industry. This effect is
related to agents preferences being influenced not only by the number of users, but also by covered territory. First we
solve the static problem of monopolistic pricing. Then we consider a dynamic expansion path of the monopoly, which
faces credit constraint. It is shown that: (1) credit is crucial in the initial stage of growth, (2) the profits of monopolist
monotonously increase with coverage, (3) the monopolist in some cases may cover even empty spaces and (4) the
price increases with time.
The use of new technologies related to the transmission of information is connected with strong network effects. The
topic of network externalities became increasingly popular in the literature on industrial organization over last two
decades (see [Katz-Shapiro-85], [Economides-96]), but there are still many open questions.
The paper aims to derive possible consequences for the monopolist facing a continuum of consumers, with double
network externality of multiplicative type with respect to index. The reason for a selection of such specification is
two-fold. On one hand, it naturally captures the “technology” of mobile communications, where agents value not only
network, but also outside factor, controlled by a firm (spatial coverage). On the other hand, it allows for a firm to shift
“network frontier” (the network size as a function of price) by changing the coverage. Analogous models, in which a
variety of upgraded modifications in software industry (which are also controlled by a firm, but represent a discrete
set) were already studied (see [Fudenberg-Tirole-98], [Ellison-Fudenberg-00]). Spatial coverage, however, represents
a continuum of varieties and requires different approach. Another difference from the existing literature is that in our
model the firm does not need to care about simultaneous existence of different varieties in the market, since at any
time there can be only one variety of good (coverage at particular time) in the whole market.
The paper shows that, for any positive level of fixed and variable costs, the monopolist faces increasing-returns-toscale technology, naturally emerging from network externality. The firm needs initial credit to start the business and
be able to get intertemporal positive profits. We also found that the monopolist is interested in the fastest expansion,
and thus optimally chooses to reinvest all profits in technology until optimal coverage is reached, pay debt and only
then enjoy monopoly power. We also study a static framework, which can be interpreted as an access to unlimited
credit. Then, under certain conditions, the monopolist may be interested in full coverage of the territory, including
“empty spaces”; the firm in this case is driven not by competition, but only by network externality effect.
In the paper we analyze different optimization problems which a monopoly has to solve in the presence of network
externality. First we study the problem with fixed coverage and find how the demand, given by network size, depends
on the price and for what price the firm's profits are maximized. It is shown that monopolistic profits positively
depend on coverage. This makes coverage a strategic variable similar to capital stock, which shifts production
possibility frontier upwards. We show that, if the coverage is large enough, the optimal price charged goes up with an
increase in coverage. The intuitive explanation of this result is as follows: since the network externality effect in low
populated areas becomes smaller, the monopolist is more interested in the possibility of charging higher price from
existing users, than in attracting new users.
4
We study next the simultaneous decision of the monopolist with respect to both the price and coverage. We show that,
for sufficiently low fixed and variable costs, the firm can choose full spatial coverage, including “empty spaces”,
where nobody lives. By doing so, the monopolist is driven by the benefits from the second network externality,
coming from users who value highly availability of service in non-populated areas. We also show that for low
coverage, the monopolist is unable to extract positive profits at any price. Thus, it needs some minimal capital for
investment in infrastructure before it can grow from its own profits. This leads to a natural formulation of dynamic
problem, which is studied further.
It is shown that the optimal dynamic path includes initial investment in infrastructure from the credit, full
reinvestment of profits into new infrastructure, return of credit and extraction of monopolistic profit afterwards. Due
to scale effects, the time necessary for an optimal coverage, depends crucially on the amount of initial credit. A firm
with less credit restriction has a very important advantage in competition and can become a natural monopolist.
Keywords: mobile phone industry; network externality; monopoly.
JEL Classification: L12, L96.
Literature:
1. Economides N. (1996) “The Economics of Networks”, International Journal of Industrial Organization, 14(6),
673--699.
2. Ellison G., Fudenberg D. (2000) “The Neo-Luddites's Lament: Too Many Upgrades in the Software Industry”,
RAND Journal of Economics, 31.
3. Fudenberg D., Tirole J. (2000): “Pricing a Network Good to Deter Entry”,
The Journal of Industrial Economics, 68(4), 373--391.
4. Katz M.L., Shapiro C. (1985) “Network Externalities, Competition and Compatibility”, American Economic
Review, 75(3), 424--440.
NE1.2 Angel López: Department of Applied Economics Analysis, University of Las Palmas de Gran Canaria.
Asymmetric local Networks Switching Costs in a general Model
This work proposes an alternative model to the traditionally assumed in two-way access local networks. The model
lets reinterpret a basic proposition which has been assumed in the previous works, namely, the no existence of
equilibrium when goods are close substitutes. It is demonstrated that the proposition is uniquely correct in a
concrete case of symmetry and that taking in account the switching costs between networks may exist equilibrium
even although goods are perfect substitutes. Furthermore, the proposed model lets easily represent any state of the
market and any situation either symmetric or asymmetric. In order to do it is analysed the asymmetric networks
concept. Finally, several propositions about the existence of the equilibrium as a function of switching cost, the
market development and different grades and kinds of asymmetry are presented.
JEL D4, D5, L11, L41, L96
Keywords: asymmetric networks, networks, two-way access, telecommunications, switching costs.
5
Joint Session with Earie: Network Competition – NC1
NC1.1 José G. Aguilar Barceló Instituto Complutense de Análisis Económico, Universidad Complutense de Madrid,
Spain
A dynamic model of final service competition in fixed electronic communications under a capacity regime for
interconnection
The Spanish regulatory authority recently implemented a new regime of interconnection in fixed telecommunications
based on capacity (and not per time) payments. We propose a dynamic model of final service competition where
entrants acquire first a certain capacity at the local loop (at a fixed payment) from the incumbent and then compete in
prices for the final services. We introduce the possibility by the entrants to assign efficiently the traffic they offer
between different hours along the day as well as the possibility for them to use the capacity based system as well as
the per-unit-of-time interconnection regime vis à vis the incumbent. The results show that gains in the allocation of
traffic between different peak and off peak hours allowed by the capacity regime for entrants can be very significant
and may lead to much more aggressive pricing in the final services. Entrants, under this regime, need a minimum
scale before they can allocate their interconnection services in the capacity based regime. In any case, the
simultaneous use of interconnection based on time and the one based on capacity leads always to tougher competition
in the final services markets and efficiency (internal to the firm and allocative) gains.
Key words: Interconnection per time, interconnection by capacity, dynamics of the competition, regulation
.JEL Code:C72, L13, L51, L96.
NC1.2 Réka Horváth and Dan Maldoom: DotEcon Ltd, London, UK
Fixed-mobile substitution: A simultaneous equation model with qualitative and limited dependent variables
With penetration levels as high as 70% in several developed countries, mobile telephony may present a significant
alternative to traditional fixed telephony. It is essential for future regulatory policy towards fixed services to
determine whether there is indeed any link between fixed and mobile telephony and to establish whether these
services represent one market.
As it is very difficult to assess the cross-price elasticities between the two forms of telephony in the absence of
sufficiently detailed consumer billing data, conclusions regarding the substitutability/complementarity of fixed and
mobile communications are generally based on interpretation of survey data. Naïve interpretation of UK survey data
suggests that fixed and mobile usage are complementary, as people who own mobile phones use their fixed phones
more intensively than individuals without mobile phones. However, individuals with mobile phones may simply have
a greater demand in general for telephony services. Therefore, greater fixed phone use by mobile owners does not
necessarily imply any underlying complementarity between the services.
In this paper, we analyse survey data on over 7,000 British telephone users and investigate the link between mobile
phone ownership and fixed telephone usage. In order to test for substitutability, we control for underlying tastes
affecting both fixed and mobile demand. We use an endogenous switching model to address the self-selection effects
that might result in observing higher fixed usage amongst owners of mobile phones regardless of whether fixed and
mobile telephony are substitutes or complements.
Controlling for such self-selection effects, we find that using a mobile phone significantly reduces the use of fixed
lines. This strongly supports the notion that fixed and mobile phones are substitutes.
Keywords: mobile telephony, self-selection, discrete choice models, substitution
JEL classification: C35, D12, L19, L96
6
NC1.3 Christian Koboldt & Roger Salsas, DotEcon Ltd, London, UK
Roaming Free? Roaming Network Selection and Inter-Operator Tariffs
*
International roaming – the ability to use one’s mobile phone on foreign networks – has contributed to the success of
GSM services in Europe, but has also been a constant concern for competition authorities. Whilst competition for
subscribers has driven down the cost of owning and using mobile phones, roaming charges have remained high, and
have been the subject of investigation for example by the European Commission.
However, in order to see whether high roaming charges are indeed the result of failing competition, and in order to
identify appropriate remedies, one needs to understand how technological constraints impacts on competition in the
provision of roaming services. In particular, the limited ability to direct roaming traffic onto a particular network,
combined with the need for multiple contracts in order to be able to offer continued coverage, implies that price
competition at the level of inter-operator tariffs (IOTs) is muted; rather, operators may have incentives to compete for
‘initial connections’ through coverage of hot spots.
In this paper, we model competition in the provision of wholesale roaming services, and its implications for retail
offers, depending on the ability to direct roaming traffic onto particular partner networks. Within these frameworks, it
is also possible to examine the impact of cross-border mergers that are often seen to improve an operator’s ability to
offer seamless roaming service across an increasing number of countries as a result of an enlarged footprint.
Keywords: international roaming, competition, internalisation
JEL classification: D43, L13, L42, L96
NC1.4 Hasan Alkas Deutsche Telekom AG, Pricing and Regulatory Economics, Bonn, Germany
The Experience with Price Bundling in Germany with focus on Lock-In Effects and Leveraging of Market
Power
In this paper price bundling in the telecommunications market will be analysed with focus on lock-in effects and
leveraging of market power. Most of the optional tariffs include service bundles and are offered in combination with
different pricing models, such as two-part tariffs or flat-rates. Price bundling means that in general the sum of the
separate prices of the services included in the bundle is higher than that of the bundle itself. Multiproduct firms offer
their services either through pure bundling, where only the complete bundle is offered or as mixed bundling, where
beside the complete bundle the components are also sold separately. Especially to reduce the heterogeneous consumer
types firms not only offer pure bundles, they supply the services also individually. In most cases mixed price bundling
is profitable, not only due to revealing preferences of heterogeneous consumers.
The main purpose of offering bundles is providing best choices to customers in order to optimise capacities and
demonstrate competitiveness through market orientated pricing strategies. Due to the high proportion of fixed costs of
the telecommunications network, it is reasonable to offer different bundles with varying fixed and variable charges. A
similar reason for offering optional bundles is a soft re-balancing strategy of Deutsche Telekom, to facilitate cost
covering tariffs. In general efficient optional bundles result from competition and reflect improvements in efficiency
of the providers. However, the competitors regard bundles as critical, since they argue that the price advantage of
bundles creates lock-in effects and leveraging of market power.
Since from the customer view of point the price advantage resulting from bundles are important, they provide
incentives that customers prefer rather the bundle than its separate components. Particularly since bundles of services
in a one-stop-shop lowers also the transaction and searching costs of the consumers. Also from a welfare economic
standpoint price bundling might be advantageous, if it can increase the quantity in demand. Especially mixed bundling
opens the possibility for customers to select the best tariff either as an bundle or separately. However, besides these
positive effects of price bundling they are on the regulatory agenda in Germany. The main question here is to analyse
the influence of price advantages associated with bundles on the willingness of customers to move to competitors.
Regarding the lock-in effect, our argument is, that in a fixed cost intensive telecommunications sector, where mainly
capacity is offered it is rational to reduce churn rates. It means to some extend a lock-in of consumers is necessary in
order to avoid inefficient under utilisation of existing network capacities, since it is known that telecommunications
services are not storable. Furthermore, as Deutsche Telekom is not tying services and the existing possibility that the
consumer can take in parallel also offers from the competitors increases their flexibility. In addition competitors
offering only parts of the bundle, can complete their offers by purchasing the missing parts by Deutsche Telekom, as
nearly all services are unbundled and offered at the wholesale level.
From this perspective, the allegation regarding lock-in effects and leveraging of market power in combination with
cross subsidizing from markets without competition to the competitive market will be discussed. A basic discussion of
7
the regulatory framework for price bundling concludes that from the market perspective they can improve the
situation of all market participants and therefore there is no need for further regulation. Furthermore we will argue that
the influence of lock-in effects, are low and therefor can be neglected. The arguments support the assumption that a
stricter ex ante regulation can distort market forces and competition such as reducing the options for customers to
select the best suitable bundles.
Regulation Policy (3 Sessions) – R3
R3.1 Neal C. Stolleman, Associate Professor of Economics, Baruch College, CUNY, New York
A Stochastic Theory of the Regulatory Constraint
Despite the promise of new technologies, expanding competition and seismic shifts in its structure, the U.S.
telecommunications industry continues to operate to a significant degree within regulatory constraints. Separate
regulatory frameworks exist at the federal and state levels. A myriad of rules, regulations and procedures cover such
things as the maximum allowed rate of return on plant in service, jurisdictional cost allocation, pricing, market entry
criteria, network unbundling, interconnection, radio spectrum allocation, merger and acquisition approval, quality of
service standards and reporting requirements. The landscape is complicated, and the contours are different depending
on the corporate entity and jurisdiction are involved. The regulatory infrastructure itself is in a state of evolution as it
seeks to modify behavior in accordance with policy objectives, and the imperatives of court challenges and legislative
directives.
The purpose of this paper is to examine the interaction between a stylized regulatory constraint and the stochastic
investment behavior of a regulated firm. The Averach-Johnson model (AJ) of course described the influence of rate
base rate-of-return (ROR) regulation in creating an incentive to use an excessively high capital-labor ratio. In the late
1980’s and early 1990’s a number of papers contrasted ROR and price cap forms of regulation, including papers by
Cabral and Riordan, Monson and Larson, Braeutigam and Panzar, and Stolleman. Comparisons between the
alternative regulatory forms included the effects on input choices, and incentives to invest and innovate. Stolleman
concluded that an expectation of improved regulatory treatment in the future could deter current period investment, in
the same way that an expected decrease in the price of capital goods raises the user cost of capital.
The environment has since become more complex and fast moving. The linkage between a firm’s behavior and the
derived regulatory response means that expectations formation can no longer be viewed as a process essentially
independent of the current investment decision. Investment decisions are made on the basis of comparing marginal
profitability against the marginal cost of risk inherent in new technology. But beyond that criterion, decisions may be
made on the basis of how the firm expects the regulator to react to its decision, i.e. the regulatory payoff. The recent
declaration by a large carrier to withhold DSL deployment unless regulatory treatment improves is an example of how
current behavior shapes expectations, as opposed to making a decision conditional on an expectation. The crux of the
matter is: a) If the firm miscalculates what the regulator will do and makes “incorrect” investment decisions, how long
does it take to adjust its expectations, and b) In the meantime, how do the derivative regulatory responses to those
incorrect decisions feedback to and influence the firm’s corrective adjustments.
This paper will examine the conditions under which interactions between the firm and the regulator can lead to a
volatile or unstable investment trajectory, thereby influencing the evolution of the firm’s value (defined as the
cumulative expected discounted value of its profit streams). The regulatory constraint considered is a stylized
variation of the AJ model, but in fact it can be interpreted as any action the regulator takes to tighten or loosen the
maximum attainable net profit in light of policy goals and available information. In turn, the firm processes available
information about the regulator’s behavior, integrating its subjective probability distribution with its propensity to
adjust expectations, i.e. its intensity of choice (William Brock). For example, if the environment has been stable and
the firm has a high degree of confidence that it will continue, then it will adopt an inexpensive naïve expectations
strategy – invest assuming the regulatory payoff will continue as is. If the naïve strategy proves wrong, the firm will
have a low degree of confidence in its own beliefs – the expected payoff deviates from the risk inherent in new
technology. Depending on its propensity to adjust, the firm will spend resources to acquire additional information in
order to better identify the regulator’s reaction function. It will then make its investment decision based on a
(expensive) rational expectation of the regulatory payoff that balances the risks built into the investment process. The
paper will examine the conditions under which imbalances between the expected regulatory payoff and the marginal
cost of risk are over corrected, leading to increased investment volatility.
JEL classification: C61, C62, D21, D81, D84, D92, L51
Keywords: investment volatility, expectations, regulatory constraint, dynamic
telecommunications
8
optimization, stochastic control,
R3.2 Rainer Schnepfleitner (RTR), Annegret.Groebel, Germany
"What degree of harmonization is needed on the local level in the internal
market?"
It tries to analyze the effects of different national regulatory approaches to create local competition and the harm the
different approaches might have for the development of the internal market. Thus it touches on the question of
division of labor between NRAs and the Commission (do we need a Euroregulator) and will also focus on competition
in local markets as well as in the broadband access market: substitution effects with CATV and/or cellular services,
narrowband internet access. This topic is high on the agenda worldwide, we will recap the discussions in the USA and
in Europe how best to promote a competitive broadband market without strangling investment in new broadband
infrastructure. Thus a wide range of issues is covered.
JEL-Codes :L5, L9, M2, M4
Keywords: telecoms regulation , internal market implications.
R3.3 Günther Knieps, Prof. Dr. Albert-Ludwigs-Universität Freiburg i. Br, Germany
Wholesale/retail pricing in telecom markets*
Since 1998 market entry has been permitted nearly world-wide for all parts of the telecommunications networks,
including both cable-based infrastructure and telephone services. Global entry deregulation, however, does not
automatically imply the abolishment of all sector-specific regulations. On the contrary, the new telecommunications
laws in many countries can be considered as “baroque” highly sophisticated sets of rules, which, in combination with
additional decrees, form the legal basis for a wide range of future regulations, such as an obligation to provide
network interconnection and network access, the detailed regulation of tariffs, including the control of the underlying
cost conditions, etc. The 1999 Review of the European Commission indicates that in the future sector-specific
regulation may even be extended to include markets not yet regulated (e.g. mobile telephony) and new markets (e.g.
Internet services) (cf. Knieps 2001a, p. 648). It is well known from the positive theory of regulation and from public
choice theory that incumbents as well as potential entrants may attempt to use the regulatory process as a means to
subvert competition. For the evaluation of the proper role of the regulator’s mission three fundamental questions have
to be answered: Why regulate? What to regulate? How to regulate?
JEL: L5, L9; Bottleneck regulation,
welfare increasing price differentiation, price-structure flexibility
9
R3.4 Livio Cricelli, University of Cassino, Dipartimento di Meccanica, Strutture, Ambiente e Territorio
Massimo Gastaldi, University of l’Aquila, Dipartimento di Ingegneria Elettrica
Nathan Levialdi, University of Rome “Tor Vergata”, Dipartimento di Informatica, Sistemi e Produzione, Italy
The wholesale competition in International Telecommunications
Over the last decade, regulatory reforms and technological progress have had strong impacts on the
telecommunications sector in most industrialized countries. The rise in telecommunications intensity, has created a
strong demand for international telecommunications services. This have changed the functioning of international
telecommunications system, traditionally based upon bilateral trade cartels among the monopolists serving each
national market. The increasing volume of international calls and the corresponding growing number of carriers are
moving telecommunications from the traditional monopoly to a market with growing competitive pressure. The older
scenario of telecommunication services formed by state monopoly carriers have changed into one in which there are
different competitive companies interconnected internationally.
An international call utilizes the services of a telephone company at each end (final market) while the revenue is
collected by the originating telephone company from the party initiating the call. One company then compensates the
other for the cost incurred in handling the call by means of tariffs (intermediate market). In this framework, telephone
services may be considered as a production system where each producer has the following characteristics:
- each producer has a different final market share in its own market;
- each producer operates both in the intermediate and in the final market;
- each producer must purchase the intermediate good from the other producers.
This market form has some parallels with the standard vertical integration model and can be seen as an extension in
which the production links stretch out in both directions. This is the fundamental complicating phenomenon that
besets the deregulation of telephone services.
In this paper, we analyse the international wholesale market in which carriers compete in the intermediate market over
the tariffs in order to increase their market share. In particular we consider the potential incumbent reaction, through
an undercutting strategy, in order to prevent the entry in the wholesale market of a newcomer IP based carrier.
References
Carter M. and Wright J., “Symbiotic Production: the Case of Telecommunication Pricing”, Review of Industrial
Organization,1994, 9, pp. 365-378.
Cricelli L., Gastaldi M. e N. Levialdi, “Vertical Integration in International Telecommunications System”, The Review
of Industrial Organization, 1999, 14.
Doyle, C., Smith, J.C., “Market Structure in Mobile Telecoms: Qualified Indirect Access and the Receiver Pays
Principle”, Information Economics and Policy, 1998, 10, pp. 471-488.
Economides N., “The Economies of Networks”, International Journal of Industrial Organization, 1996, 14, 2.
Galbi D.A., Cross-Border Rent Shifting in International Telecommunications, Information Economics and Policy,
1999, 10, pp. 515-536
JEL: L11, L12, L96;
Keywords: international telecommunications, IP telephony, wholesale competition.
10
R3.5 Jordi Gual, Professor IESE, Spain
Regulatory framework and development of electronic communications in Europe
Any reflection on the regulatory environment which can best contribute to the development of electronic
communications in Europe must take into consideration the recently approved “new EU regulatory framework”. The
new directives represent a significant move in the right direction for at least three reasons. The new framework aims
to adapt the regulatory system to the changes taking place in markets as a result of technological progress and the
response of companies and consumers to the liberalization process. The new regulations also reaffirm the
determination to reduce the amount of regulation in the industry, starting a process of transition towards a free market
legal system similar to that of other industries and based on competition policy as the guarantee of a competitive
environment. Finally, the new framework attempts to increase harmonization of the competitive conditions in all
Member States, in a complex balance between the imposition of regulations which guarantee the Single Market and
respect for the principle of subsidiarity, as established in the European Treaties.
The aim of this document is to contribute to an open debate in Europe about the pace and nature of the
process of liberalization of the telecommunications industry and to analyse which courses of action in the
liberalization process could most usefully contribute to a rapid and harmonious development of electronic
communications in the European Union. This reflection is necessary for two reasons.
Firstly, because the “new regulatory framework” which has just been established at the EU level is only a
general legal framework. Its impact on the development of European electronic communications will largely depend
on the philosophy of legislative translation of the approved regulations in the Member States and on the practical
application of the coordination mechanisms contemplated by the new legislation. These mechanisms allow a
significant margin of discretion in the regulation approved by Member States.
Secondly, because in an industry as dynamic and complex as telecommunications and other related
industries, it is important for the regulatory framework to be flexible, so that it can be rapidly adapted to changes in
the environment and help to eliminate rigidities and regulations which hinder technological progress and business
initiative. In this respect, this document analyses those aspects of the regulations which tackle the development of the
industry and which have only been partially dealt with in the recent legislative changes.
The document is structured as follows. Following this introduction, the analysis is carried out on the basis of a
fundamental distinction between the conventional segments of the industry (for example, voice telephony and narrow
band Internet) and those, such as mobiles or broadband, which constitute businesses still in the phase of expansion.
There is a very simple explanation for this distinction. The economic nature of these types of businesses is radically
different and it is therefore unlikely that the appropriate policies of regulation and competition should be the same.
For each segment there is a brief description of the impact of the regulatory framework so far and, bearing in mind the
economic foundations of each segment, a general consideration of the criteria a future regulation aimed at developing
the industry should follow. This development should respond to the general objective of ensuring a supply of
communication services in a competitive environment, with quality services, investment in new networks, innovation
in supply and financial balance of the companies. Another section of the document focuses on the process of
Europeanization of the industry by analysing the aspects of the regulatory environment hindering the construction of
an integrated European market, even taking into account the instruments of coordination approved in the latest
legislative package. Areas in which an active policy at the EU level would be desirable are also discussed. The
conclusion summarizes the main messages of the document.
11
R3.6 Kenneth Fjell, Associate professor, Norwegian School of Economics and Business Administration
Elasticity based pricing rules in telecommunications – a cautionary note
To recover large common (sunk) costs, telecommunications operators are often recommended to follow an inverse
elasticity based pricing; setting the highest markups for the services with the least elastic demand. This is based on the
seemingly simple rule for profit maximization proposed in many microeconomics textbooks for marking up marginal


 1 
mc . This inverse elasticity rule also appears in the well-known Ramsey rule, which has been
cost; p  
1

1 


frequently debated as a regulators tool for curbing monopoly pricing in telecommunications while minimizing
deadweight losses.
The inverse elasticity rule is all too often described in a way that implies a myopic application (e.g. Dobson, Maddala,
and Miller, 1995, or Mansfield and Yohe, 2000). This is unfortunate, as management in telecommunications and other
industries may adopt the rule at face value. The consequences of applying the pricing rule in a myopic manner are
found by analyzing the effect on prescribed “profit maximizing” price by the rule following a change in initial price:
In case (i) where initial demand is elastic and elasticity increases in price we get that, (a) if marginal cost is constant, a
myopic application of the rule will lead to an overshooting of the profit maximizing price: If current price is below
(above) the profit maximizing price, the rule will suggest a price above (below) the profit maximizing price. (b) If
marginal cost is increasing, overshooting effect will increase. (c) If marginal cost is decreasing, the overshooting
effect will be reduced – and possibly cancelled out or reversed.
In case (ii) where price elasticity of demand is constant and elastic, and (a) marginal cost is also constant, a myopic
application of the rule will yield the correct, profit maximizing price – regardless of initial price. However, (b) if
marginal cost is increasing, an overshooting will result, and (c) if marginal cost is decreasing, an undershooting of the
profit maximizing price will result.
In case (iii) where price elasticity of demand is inelastic and elasticity increases in price, (a) we will get overshooting
identical to case (i) for constant marginal cost, but the results are reversed relative to case (i), otherwise. (b) If
marginal cost is increasing, we the overshooting effect is reduced, and (c) if marginal cost is decreasing, the
overshooting effect will be exacerbated.
In conclusion, with only local knowledge of demand and marginal cost, the rule is difficult to use and will in most
cases lead to an overshooting of the correct price. To be effective, the rule requires full knowledge of demand and
marginal cost, and as such offers no advantage over the more traditional approach of equating marginal revenue to
marginal cost directly.
JEL classification: A22, D4, L19
Keywords: Markup pricing, elasticity, Ramsey pricing, telecommunications
References
Baumol, William J., John C. Panzar, and Robert D. Willig. 1988. Contestable markets and the theory of industry
structure. Rev. ed. San Diego: Harcourt Brace Jovanovich.
Dobson, Stephen, G. S. Maddala, and Ellen Miller. 1995. Microeconomics. New York: McGraw-Hill Book Co.
Gabel, David, and David F. Weiman. 1998. Opening networks to competition : the regulation and pricing of access,
Topics in regulatory economics and policy series ; 27. Boston: Kluwer Academic Publishers.
Laffont, Jean-Jacques, and Jean Tirole. 2000. Competition in telecommunications, Munich lectures in economics.
Cambridge, Mass.: MIT Press.
Mansfield, Edwin, and Gary W. Yohe. 2000. Microeconomics : theory/applications. 10th ed. New York, N.Y.: W.W.
Norton.
Nicholson, Walter. 2000. Intermediate Microeconomics - and its application. 8th ed. Fort Worth: The Dryden Press.
Pindyck, Robert S., and Daniel L. Rubinfeld. 2001. Microeconomics. 5th ed, Prentice-Hall series in economics.
Upper Saddle River, NJ: Prentice Hall.
Ramsey, F.P. 1927. A Contribution to the Theory of Taxation. Economic Journal 37 (March):47-61.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Jr. Harrington. 1998. Economics of Regulation and Antitrust. 2nd ed.
London: The MIT Press.
Vogelsang, Ingo, and Bridger M. Mitchell. 1997. Telecommunications competition : the last ten miles, AEI studies in
telecommunications deregulation. Cambridge, Mass.: MIT Press.
Wilson, Robert B. 1993. Nonlinear Pricing. New York: Oxford University Press.
12
R3.7 Raquel Noriega Sandberg: Senior Economist, Fundación de Estudios de Regulación, Madrid, Spain
Vertical Structural Separation in Telecommunications: Remedy or Burden
The paper analyses the current regulatory debate regarding measures of structural separation in the
telecommunications sector of wholesale and retail operations of incumbent carriers. This regulatory reform is
currently under examination in various international jurisdictions (European Union, USA, Australia, Japan) as a
remedy for alleged failures of the development of competition in telecommunications fixed network provision. The
European Commission is currently undertaking a formal consultation on the matter.
The paper is organised as follows. Section I considers the incentives of the three key parties involved in the debate:
new entrants, incumbent carriers and regulatory authorities. In section II I analyse current developments in the
telecommunications sector including: technological and strategic developments underway which are transforming the
basic business model in the sector, as well as regulatory developments underway, particularly in Europe given the new
Regulatory Framework. Section III presents a framework to assess the net benefits of the proposed regulatory reform
given the principle of efficient or minimal regulation and assessing costs and benefits of the proposal within the
current regulatory framework in the sector. Given this framework in Section IV I assess the effects of structural
separation given current competitive trends, with particular emphasis to the Spanish market. Static and dynamic
effects of this reform are analyse taking account of economic incentives to incumbents and alternative carriers
generated by structural separation. Three segments of the market are considered here: the traditional voice segment,
the development of broadband infrastructure and services and effects in the related segment of interactive TV.
Section V presents preliminary conclusions as follows:
Consumers are likely to be harmed by this proposal. Net consumer welfare could be negatively affected by higher
prices, lower quality of service, less choice of service differentiation and a decrease of dynamic innovation and
investment.
 Structural separation will not affect wholesale prices.
 Structural separation (in Spain) may increase retail prices for broadband access.
 Structural separation will not simplify the supervisory task of regulators: information asymmetries between
regulator and incumbent network provider will remain as well as the incentive of the wholesale provider to
inflate costs.
 Structural separation will generate additional costs that may be passed on to consumers in the form of higher
prices, lower quality, less choice or all of these. The coordination of investment and production decisions in
the sector is high. Transaction costs of arms-length contractual arrangements between wholesale and retail
providers are high, specially at this point of acute innovation. Structural separation will increase costs of such
coordination for the main fixed network in the market, costs that are likely to be passed on to consumers.
 Structural separation of incumbent telecommunication operators may generate disincentives to investment in
infrastructure in the long run.
 Structural separation is an inefficient regulatory instrument particularly when juxtaposed to current Open
Network Access framework in Europe.
13
R3.8 Chris Doyle, Warwick Business School, UK, Gary Madden, Curtin Business School, Australia
Mobile Telecommunications and Competition Policy: Comparing Australia and the United Kingdom
When mobile telecommunications first commenced commercial operations in many countries, industry specific
economic regulation was relatively light. In contrast to fixed telephony, mobile telephony often started from a position
of (limited) competition. However, through time regulators have subjected mobile telephony to increasing amounts of
regulation. Mobile number portability has often been mandated by regulators, and in recent years much more attention
has been given to the pricing of calls to mobile networks.
Economic theory, while not conclusive on the subject of call termination, indicates that for a broad range of market
structures monopoly power is an issue, (Armstrong, 2002). Where a network operator uses monopoly (or market)
power to increase prices (that is set prices above costs) for call termination, this may not be a significant problem if
excess profits in call termination are eroded by ‘excessive’ competition elsewhere in the market. Typically it is argued
that competition is fierce both for subscribers and call origination, and consequently overall profits are likely to be
‘normal’ – the so-called swings-and-roundabouts argument.
Whether it is in fact the case that call termination profits tend to be eroded by competition in other areas of the mobile
market is an empirical issue. However, even if it were true, it would remain the case that prices are likely to be
distorted away from those that guarantee efficiency. However, whether price regulation is a proportionate remedy to
the problem of monopoly power in call termination markets is a contentious issue.
In this paper we examine the approaches to regulating mobile call termination charges in Australia and the UK. In
both countries regulatory and competition agencies are examining the appropriate form of economic regulation in the
mobile sector. While the two markets have different properties, they do nevertheless share many generic features.
Despite this, the approaches to the problem of call termination have been somewhat different.
Our paper describes the approaches of the various agencies involved, and summarizes the economics of mobile
telephony. We begin by looking at market definition: Is the market for receiving calls well-defined versus a market for
a bundle of services as most consumers presumably understand? We next look at the economic theory of relevance to
the mobile telephony sector. We then present two extended case studies: the first looking at Australia and the second
looking at the UK. Lessons for policy are provided before a concluding section.
R3.9 Alain BOURDEAU de FONTENAY, deFSK
What have we failed to learn from the post 1996 era in the U.S.?
Local telecommunications’ economies of scale and scope are the result of incumbents’ vertical and horizontal
structure, not the other way around.
Page 78
14
E-Commerce – E1
E1.1 Brigitte Preissl: DIW German Institute for Economic Research
Measuring e-business impact: phenomena, facts and figures
The deep impact that the internet will have on the shape, performance and dynamics of the economy seems to be
widely acknowledged. It is difficult, however, to track this impact in terms of consistent statistical measures. There is
no scarcity of data for actual and expected e-business turnover in various markets and industries. However, these
figures miss a large part of the story, and their interpretation often leads to a distorted picture of the actual phenomena.
This is due to various factors which contribute to the complexity of the measurement task:
- The common turnover/sales figures overestimate the phenomenon, since E-business transactions do not simply add
to traditional economic activity, but substitute other forms of interaction. It is often difficult to tell which part the
turnover that is being effected via electronic channels is additional and which is substituting turnover that has
previously been handled via other channels. On the other hand, they underestimate the impact, since they do not
document changes in business processes and organisational adjustments.
- There is no generally accepted definition of what constitutes an electronic transaction.
- Electronic markets transcend national boundaries, but cross-border transactions are difficult to trace. Hence the
relevant market is often not clearly defined.
- The Internet opens up options for a wide range of applications, the actual realisation these options in a given
economy cannot be deducted from the technical characteristics of networked systems, but emerges with the
implementation of new business models. There are popular examples of intriguing e-business models, but little is
known about their relevance for the majority of actors in the economy.
- While some indicators, such as the number of companies with internet access, enter statistics with relatively short
time lags, others (like productivity effects in adopting industries) are rather indirect and occur after considerable
time lags. The time lags for impact vary according to framework conditions, like business cycles, competitive
conditions in an industry, e-business activity in supply chains and customer markets.
- Effects are difficult to attribute to e-business, if the exploitation of the benefits of electronic systems relies on
major qualitative adjustments in organisation, procedures and the labour force.
- E-business implementation stretches over time, hence, some firms and industries will only have started planning,
while others already are in the phase of amortising initial investment. Hence, in industry indicators the effects of
high investment and low returns in one firm will be neutralised by diminishing investment and increasing returns
in another.
- Official statistics are not designed to document rather new phenomena, nor would it be wise to change statistical
systems, classifications and concepts on a short term basis. The data on internet transactions are provided by
consultancy firms that do not use standardized industry or commodity classifications, hence they cannot be
combined with more remote and differently categorised statistical data.
- The impact of e-business on the economy can only be observed, if e-business indicators use the same statistical
units as other economic indicators. In the past, a confusing variety of definitions for output, industries, firms,
transactions and e-business has made it impossible to relate the vast amount of e-business data to economic
performance indicators.
Two central challenges arise from these conceptual stumble stones: the linking of e-business indicators to other
economic indicators and the construction of meaningful impact indicators from rather arbitrary accounts of ever more
dynamically expanding e-business activities.
This challenge has been taken up by a research project which studies the impact of the adoption of e-business in 15
industries across Europe. In a representative telephone survey, companies have been asked to state the level of ebusiness usage and its impact on their organisation and strategies. The aim of the project is to provide an e-business
monitor which allows to relate e-business indicators to other statistical indicators provided in standard official data on
European economies. In the proposed paper the conceptual basis for the survey will be outlined, and the survey design
will be presented. The project focuses on e-business adoption, i.e., it does not cover the effects of the supply of ebusiness services in hardware and software industries. Concepts and definitions for the following phenomena will be
discussed:
units of research,
notions of e-business and e-commerce,
electronic transactions,
readiness for e-business application,
usage
impact.
The paper will discuss the relevant phenomena, existing solutions and their suitability and present the (rather
pragmatic) approaches that have been adopted in the current project.
15
E1.2 Alko Smit, Telematica Institut, Harry Bouwman, Delft University of Technology, Policy and Management,
Erwin Fielt, Telematica Institut, Holland
Hybrid Commerce in the Netherland
Both in business and academic literature researchers pay attention to click-and-mortar e-commerce strategies.
However little empirical work is available about how organizations pursue synergy effects by combining e-commerce
with their physical channels. In this article we present empirical data on how organizations in the Netherlands use the
internet to support their existing commerce processes. In the course of 2000 and 2001 we conducted a case study
amongst 20 firms, followed by a survey for a broader validation of our insights. We learned that hybrid commerce
strategies are not commonly pursued and that decisions on a combined use of physical and internet channels to
support transactions are mainly made on an operational level
Key Words: e-commerce, multi-channel,business models, bricks & clicks, case-study
JEL: L29, L19, L81
E1.3 Kim Kwan Young, Ulaanbaatar University in Mongolia
A Study on Management Strategy For Bidding Intention On Web-Based Auction Site: Comparative Analysis
of Korea and Argentina Case
Web-based auction is familiarized by the help of the Internet which is to be fundamental tool for the E-commerce.
Consumer is given to choose a web-based auction site based on a wealth of online information. With this
circumstance, researchers have focused on the auction model and information content to derive consumer’s bidding
intention and behavior. Web-based auction is shown to the bidders by web interface. Therefore, web-based auction
site’s design factor is regarded as one of the main elements for evaluation of online auction site and differential factor
on bidding intention by national difference. However, little effort has been made in analyzing the relationship between
bidding behavior and design factor of web-based auction site. Besides, none of researches addressed strategy issue by
considering national difference between two nations such as difference between Korea standing for East Asia and
Argentina for Latin America.
This paper addresses (1) the relationship between web site design factor and consumer’s bidding behavior using
perception of bidder and (2) difference of bidding attitude/intention of web-based auction between Korean and
Argentina. Web-design factors were selected as following: site architecture, information design and information
content of the web site. Web design factors of web-based auction site are analyzed compared with perception
variables: perceived usefulness of web design and information, and perceived ease-of-use. The national difference
between Korea and Argentina standing for East Asia, Latin America respectively was derived. This experimental
study shows that web-based auction site’s design factors and bidder’s characteristics are positively related to the
attitude toward bidding participation and hence intention for bidding participation in Korea contrary to Argentina in
which web design factors and bidder’s characteristics factors are closely related to attitude but does not influence on
intention for bidding participation in Argentina. In addition, national characteristics between two nations are shown in
terms of approach of management strategy. The state of national E-commerce infrastructure and people’s perception
for online transaction influence attitude and intention on web site transaction. Four hypotheses are derived as
followings:
(1) Web design factors positively influence consumer’s perception on website, (2) Perceived website usefulness
positively influence the attitude/ intention, (3) Attitude toward bidding positively influences intention of bidding
participation, and (4) Bidder’s characteristics influences the attitude/intention. Results of test are shown that all
hypotheses are partially accepted except hypothesis of 3: Attitude toward bidding participation positively influences
the intention for bidding participation. On the other hand, hypothesis 3 is accepted in Korea but rejected in Argentina.
This paper explains the reason why attitude toward bidding participation does not influence positively intention for
bidding behavior in Argentina. Further, this paper gives us chance to derive the implication about management
strategy for online auction site in the field of E-commerce.
Keyword: Management Strategy, Web-based auction, Internet Auction, Online Auction, Electronic Commerce,
Bidding Intention
16
E1.4 Stefan W. Schmitz, Research Unit for Institutional Change and European Integration - ICE, Austrian Academy
of Sciences, Peter Paul Sint, Research Unit for Institutional Change and European Integration - ICE, Austrian
Academy of Sciences, Austria
The Effects of Company Characteristics and Strategy on the Performance of Viennese B2C eCommerce
Companies: An Econometric Analysis
In January and February 2001 an in-depth-survey among 58 B2C eCommerce companies in Vienna was conducted. It
aimed at generating data on company characteristics (e.g. number of customers, pure online vs. multichannel etc.),
company strategies (e. g. disintermediation, marketing, outsourcing, cross-promotion, customer acquisition costs,
pricing strategy etc.)and the role of deterritorialisation as well as regional economic and technology policy. One year
later a second short questionnaire was circulated to gather data on success factors and changes in turnover in 2001.
The paper presents the most interesting data of the two surveys and their econometric analysis. In the first section we
provide a detailed description of the survey and its methods. In the second section we will compare the expected and
realised rates of change in turnover in 2001 and discuss whether Viennese B2C eCommerce companies have
systematically under- or overestimated it. Furthermore, we will briefly outline the survey results with respect to
disintermediation and pricing strategy in Viennese B2C eCommerce. The third and major section of the paper will
focus on the effects of company characteristics and company strategies on the performance of Viennese B2C
eCommerce companies in 2001. We provide econometric analysis to model three dependent variables in turn: (i)
number of B2C eCommerce customers in 2000, (ii) number of B2C eCommerce employees in January 2001 and (iii)
changes in B2C eCommerce turnover in 2001. Both, the independent as well as the dependent variables are derived
from the two surveys. We base our analysis on linear specifications and three complementary methods of model
selection: (i) general-to-specific, (ii) stepwise regression based on the Akaike information criterion and (iii) a number
of basic models and their extensions (based on t-statistics and R2).
Furthermore, the diagnostics hint at potential non-linearities such that we also present a number of non-linear
specifications. The models do explain the data quite well and the findings shed light on the success factors of B2C
eCommerce. The final section presents the conclusions, their implications for the ongoing debate on the intensity of
competition in B2C eCommerce, critically discusses the results and points at extensions and further research.
E1.5 Mikyoung Ha, Invited Researcher of Electronics and Telecommunications Research Institute
Dong-Hoon Yang , Assistant Professor of School of Management, Information and Communications University
More Information Enables Lower Prices? A Comparison of Korean Internet and Conventional Retailers
Internet has become the most important part of daily life and the number of Internet users has been increased
dramatically. Since Internet has become an important part of business and economic activities, numerous researches
describe the Internet as a tool that has changed the world and some economists describe it as a tool that facilitates the
perfect competition market. This study aims to verify this claim by looking at retailers’ prices of books and CDs.
Through Internet search engines, consumers can find the product with lowest price and highest quality more easily
than before. This results in the decrease in price since suppliers compete with price. By reducing search costs, buyers
will be able to access more products and purchase products that match their needs better which in turn enhances the
economic efficiency. This study tests the economic efficiency of Korean Internet market with two hypotheses.
Hypothesis 1 is to examine whether price level of the Internet market is lower than the conventional market.
Hypothesis 2 states that the price of Internet market is less dispersed than that of conventional market. Our analysis
suggests that Internet retailers charge lower prices than conventional retailers do. This result is not sensitive to the use
of either posted price or full price in our analysis. Thus, this finding supports the hypothesis 1 that the Internet
provides a more efficient channel for the products we track. We also find that the dispersion of Internet retailers’
posted prices is highest whereas the dispersions of full prices of both Internet and conventional retailers exhibit no
significant difference. The result is not consistent with previous studies hence it seems that the development of
Internet commerce is on the way of development. Despite the meaningful implications, our results are subject to
several limitations. First, until 2000, consumers had to pay full amounts of the listed prices in Korean book market,
because pricing policy was under regulation. Until now, most conventional book retailers are against the abrogation of
price regulation, hence conventional retailers tend to less discount than Internet retailers. Thus, the result that the
Internet retailers charge lower prices than conventional retailers do may seem to be natural. Second, this study does
not account for the market leadership. Brynjolfsson(2000)points out that several firms set prices well below those of
the market leaders without getting significant market share. In addition, a few heavily branded retailers are dominant
and the concentration around the market leader’s price is enhanced by the fact that the next largest retailers in each
product category seem to set prices very close to the market leader’s price. Therefore, without the consideration of
market share, it is too early to jump to the conclusion that the Internet retailers charge lower prices than the
conventional retailers do .
Key Word : Bertrand Model, Electronic Commerce, Price Dispersion, Price Level
JEL : D4, M0
17
Defining Market Power – DMP1
DMP1.1 Alexandre de Streel : European Commision andEuropean University of Namur, Robert. Queck : University
of Namur, Belgium
The concept of Significant market power under the new EU regulatory framework for electronic
communications
The paper describes the revised concept of Significant market power, which is the criterion to impose the main exante obligations in electronic communications sector. The concept has been substantially modified under the recently
adopted EU regulatory framework, as it will apply competition law methodologies.
The paper explains and develops the different steps for an NRA to designate an operator as having SMP: market
definition and identification and assessment of market power. By doing so, it sets out the limits of the application of
competition methodologies in an ex-ante context and shed some light on the on-going debate on the relationship
between competition law and sector-specific regulation.
DMP1.2 Ramiro Losada: Universidad Carlos III de Madrid, Spain
Network competition among mobile telecommunications operators with market influence
In the telecommunications market there are firms which own networks with different quality, moreover, the firms
with better networks usually are better considered by consumers because they were the earliest to come into the
market. These firms have the highest market share and due to this fact the National Regulatory Boards consider them
as firms with market influence, this means that if they were not regulated they could damage consumers’ welfare. The
regulation currently applied to them consists in fixing their access charges to the Long Run Incremental Costs. But
this thought about operators with market influence is changing between the National Regulatory Board and some of
them (e.g. OFTEL in UK) could change the current regulation to allow these operators to set the access charges just
through negociation.
In this paper, the current and new potential regulation are analyzed. It is shown that the current regulation can be
improved just keeping reciprocity over the access charges and it is also shown that if the operators with market
influence can negociate freely the access charges, this can get the social welfare in a worst situation comparing with
the current regulation. To carry out the analysis I consider a model where there are interconnected operators that are
vertically differentiated to pick up the fact that firms own different quality networks. Some of them are considered
with market influence. From this model it can be shown that if the firms with market influences are allowed to freely
negociated the access charges, they can collude, using them, in the retail market. Moreover they can reach monopoly
profits in some cases. From this model it is also shown that if the regulator wanted to set access charges he could not
achieve Ramsey prices in the retail market.
Keywords: Network competition, vertical differentiation, Interconnection
JEL Classification: L41, L96.
18
DMP1.3 Kirchner, Christian (Humboldt University Berlin, Germany)
Market Definition and Market Power in Mobile Phone Markets
Market definition and determination of market power of one or more companies in the field of the mobile phone
sector poses various questions. Annex I of the Framework Directive of the New Regulatory Framework refers to a
number of markets in the mobile phone sector which might covered by sector specific ex ante regulatory rules: call
origination on public mobile telephone networks, call termination on public mobile telephone networks, access to
public mobile telephone networks, including carrier selection, the national market for international roaming services
on public mobile telephone networks. The crucial issue of defining markets here is to divide whether or not every
separate mobile network has to be defined as a separate market or whether competing networks form a market. The
paper will demonstrate that there are only slight differences between a position which defines markets broadly (and
thus will not find a single or a group of enterprises possessing a dominant position) and a position which defines every
network as a market and then takes into account that the operator of a network has not a dominant position as long as
customers take into account origination, termination and access fees when they decide which operator (and thus which
network) to choose. Nevertheless a broad definition of the market is clearly preferable, because it takes into account
the substitutability of products and services as perceived by the customer. The arguments to be developed will be legal
one; but in the process of interpreting legal norms economic consequences of alternative interpretations have to be
taken into account (consequentialist method of interpretation). The results will then being transferred to problems of
applying Art. 82 EC on mobile phone markets, in order to develop a common approach for sector specific regulation
as well as for competition law.
Cybercrime, Privacy etc – C1
C1.1 Nicole Watt, Professor Joan Cooper, Lois Burgess, Dr Carole Alcock, Faculty of Informatics
University of Wollongong , Australia
Are Business on the Web Adressing consumer privacy concerns?
Attitudes towards online privacy have been considered an impediment to the widespread acceptance of E-Commerce.
Consumers want privacy protection, business want the advantages that accrue from the collection of customer
information - a valuable strategic commodity. Ensuring adequate privacy protection may be considered an essential
part of the service a business provides to the consumer. The focus of this study is to determine whether E-Commerce
sites are meeting consumers' expectations (as identified in current literature) in terms of privacy. The central tenet of
this study is to find the gap between consumer expectations of privacy and evidence of the implementation of privacy
policy on business web sites.
The study concentrates on the analysis of business websites based on a series of questions developed from an in-depth
literature review of recent publications that address consumer privacy issues. The results of the study are drawn from
a service quality gap analysis. The methodology used the purpose and philosophy of the GAPs model in measuring
service level, using privacy protection as the service attribute. This is an effective measure for determining the level of
privacy protection a site is providing.
E-COMMERCE EXPECTATIONS
The focus of this study is to determine whether e-commerce sites achieve consumers' expectations in terms of privacy.
The research will investigate the level of privacy required by online consumers.
The two levels this study will take are:
1. Consumer expectations of privacy online (as determined in current literature)
3. How businesses deal with the privacy expectations of consumers and government
Through an analysis of the consumer perceptions of privacy and online businesses' implementation of privacy
strategy, a gap in consumer expectations and implementation can be determined. A framework of key criteria of what
privacy levels a business should meet to keep its customers and the law satisfied can then be developed.
Ensuring adequate privacy protection may be considered an essential part of the service a business provides to the
consumer. A gap in service quality may occur between consumer expectations of what level of service should be
delivered and the perception of what, in actuality, is being delivered /1/. This is essential in determining what is
required for online privacy business models, so that all needs can be satisfied in regards to privacy service levels.
Certainly, from the literature, the problems currently of concern to consumers in relation to business implementation
include: tracking, spamming, not having detailed privacy policies or trust seals, information collection without
knowledge and, a major issue, no control over the information.
19
METHODOLOGY
The core research of this report is to find the gap between consumer expectations of privacy (as identified by the
literature) and the implementation of privacy on business web sites. The results are drawn from a service quality gap
analysis. The notion of a gap describes level of customer service: the difference between customer expectations and
perceptions of actual service /1/.
RESULTS
Customers have certain privacy expectations when interacting with web sites. These include: privacy policies; privacy
seals; cookie information; information on the purpose of information collection; control over the information
collected; information on who personal information is shared with; and the ability to be able to partake in transactions
anonymously. The results of the survey of the 70 websites indicate that there is still a "large gap" between what
customers' expect and what is being delivered. The main deficiency being not enough sites posting a quality privacy
policy, opt in provisions not being serviced, consent not clearly explained or direct and collection technologies not
clearly identified.
CONCLUSION
This research has identified a large privacy gap and as Australians regard privacy as the most important service
attribute /2/ then the determination the e-service quality being impacted upon is true. E-Commerce requires web sites
to be regarded as high quality and the perception that customer needs are not being serviced impact upon the
acceptance of E-Commerce /3/. Not only does privacy and the consumer concerns surrounding personal privacy stifle
E-Commerce as a whole, but also businesses may be missing out on additional benefits arising from online business
due to the lack of privacy policies. Many Australian sites are ignoring crucial privacy fundamentals of both consumer
wants and government legislation.
The next phase of the research will be the development of a privacy framework for E-Commerce sites based on the
gap analysis. This framework will be a valuable tool for organisations to manage their websites and help bridge the
privacy gap.
RERFERENCES
1.
Broadley, R. 2001, Integrating Gap Analysis and utility theory in service research, Journal of Service
Research, vol.3, no.4 pp300-309.
2. Privacy.gov.au, Office of the privacy commissioner, 2001, Privacy Amendment (Private Sector) Act 200 and
guidelines, http://www.privacy.gov.au/news/pab.html#3.2
3. Internet Industry Association, 2001, IIA Privacy Code to Tackle EU Compliance,
http://www.iia.net.au/news/000404.html
4. Internet Industry Association, 2000, IIA Welcomes Introduction of New Privacy Legislation,
http://www.iia.net.au/news/010602.html
Schoeman, C. 1992, Privacy and Social Freedom, Cambridge University Press, New York.
Keywords: electronic commerce, consumer privacy expectations, privacy policy
JEL: O33 & O39
20
C1.2 Johann Čas, Institute of Technology Assessment, Austrian Academy of Sciences
Privacy in Ubiquitous Computing Environments?
In the present the use of telecommunication and information services is tied to active actions of the user, for instance
initiating or accepting telephone calls, or surfing the internet. And mobile phones still need to be switched on in a
conscious act, before they can be located and be used to generate data on the whereabouts of its owner.
With the coming generations of information technologies this situation could change quite dramatically. Instead of
gathering required information arduously, innumerable tiny computers - invisibly integrated into the environment
where one works or lives – analyse in the background the situation and the wishes of the users and automatically try to
fulfil them. They procure the required information, coordinate any required activities, or they start automatically the
desired entertainment programmes and order the favourite drink at the same time. All this happens in a very
unobtrusive way, which makes the users simply forget the pure existence of the numerous, invisible computers and
countless processes that they initiate and execute in the background.
In a positive vision the omnipresence of countless little helpers leads to the omnipotence of their users. Keyboard and
mouse are replaced by natural-language interfaces, biometric procedures relieve from the necessity to remember
passwords or to prove any authorizations at all, a pulled up brow or a twitching in the corners of one's mouth is
sufficient to cause hectic activities of the invisible little helpers.
Where much light is, there is also much shade. If one would try to give a picture of a perfect surveillance
infrastructure, UC would probably fulfil many requests more than satisfactorily. UC does not only make possible a
total surveillance, it also demands for an extensive collection of knowledge about the users in order to be able to fulfil
its promises. It admittedly would be presumptuous to speak of omniscience, however, a system that knows more about
a person than the person itself is absolutely conceivable. The fact alone, that computers don't forget anything and don't
require any break when watching you, is sufficient for this.
It is therefore not surprising that the visions of Ubiquitous Computing are accompanied by fears of a perfect
surveillance society, and that the end of privacy is predicted. At the same time, intense research activities aim at the
development of options for UC-systems which should permit to implement these technologies and to keep certain
levels privacy at the same time. In this contribution, the threats for data protection and privacy as well as
contradictions to existing norms of this new technology field are sketched and current approaches towards dataprotection-friendly technical solutions for UC are discussed.
The paper starts with a short overview of the basic technological components required to turn the vision of UC into
reality. In a second section, current norms of the protection of personal data, the so called “fair information practices”,
are contrasted with fundamental functions and requirements of UC. In a third and concluding chapter, some recently
developed technical approaches to circumvent the dilemmas between privacy and UC are discussed.
C1.3 Bertrand Lathoud, Prof Solange Ghernaouti – Hélie, Institute of Computer Science and Organization
Business School (HEC) of the University of Lausanne, Switzerland
Cybercriminality as destabilization factor of regulation processes
The object of this article is to highlight the limits of the absence of traditional regulation in the Internet's world and the
central place the State should take by playing its traditional role of regulator through judicial power. To show the
destabilising character of cybercriminality, we underline its extent, before specifying which are the current
consequences of the insufficiency of justice's resources in its fight against cybercrime. Then we propose some ways to
be explored by future research in order to strengthen the public policies concerning the fight against informational
insecurity.
Key words: cybercriminality, vulnerabilities of key infrastructures, technological and informational risks, security's
limits, cost of insecurity, public institutions, regulating role of State.
JEL codes : K40, K42, K49, L50, O17
21
C1.4 John Ayoade University of Electro-Communications, Tokyo, Japan,
Controversy Over Encryption Restrictions And Lawful Access In Solving Crime Deterrent.
Cryptography/1/ is an effective tool for ensuring both the confidentiality and the integrity of data, and each of these
offers certain benefits. However, the widespread use of cryptography raises a number of important issues.
Governments have wide-ranging responsibilities, several of which are specifically implicated in the use of
cryptography, including protecting the privacy rights of their citizens; facilitating information and communications
systems security; encouraging economic well-being by, in part, promoting electronic commerce; maintaining public
safety; raising revenues to finance their activities; and enabling the enforcement of laws and the protection of national
security. Although, there are legitimate governmental, commercial and individual needs and uses for cryptography, it
may also be used by individuals or entities for illegal activities, which can affect public safety, national security, the
enforcement of laws, business interests, consumer interests or privacy.
Cryptography has been controlled by governments to prevent it from falling into the wrong hands. Over the past few
years, governments have increasingly worried about the threat of criminals using cryptography to thwart law
enforcement. Some governments have passed specific legislation to address this problem; others are still studying the
issue, unsure whether to attach more weight to the beneficent use of cryptography in safeguarding information
security or to its nefarious use by criminals. However, with all these moves that various governments of the world are
taking the percentage of criminal activities is increasing on a daily basis. One important point that we should note is
that one of the most important uses of cryptography in this context is that it helps to prevent crime. In the words/2/ of
James Fotis, Executive Director of the Law enforcement Alliance of America, “the threat to public safety comes from
the lack of encryption; files that are not secure are ripe for theft and misuse”. Our argument, analysis and discussions
in this research paper are that by using encryption we can reduce computer theft crimes and lower economic
espionage, rather than restricting encryption and violating people’s privacy. Power should be given to the crime
victims to protect themselves against these unwanted attacks, physical or informational.
Keywords:Privacy, Lawful Access, Cryptography, SPLC
Impact of telecom Infrastructure – ITI1
ITI1.1 Tom Björkroth, Åbo Akademi University, Department of Economics and Statistics, Turku, Finland
Investment of Telecommunication Operators and Economic Growth-Evidence from Finland
The paper examines the effect of investment in telecommunications infrastructure on the growth rate of real GDP by
using Finnish time-series data between years 1960 and 1998. This exploratory study modifies the two-sector
production function model provided Ram (1986) to take into account not only telecom investments, but also private
and public investments together with a proxy of increases in human capital as well. The results support the view of
several cross sectional studies that telecommunications infrastructure capital provides the economy an input with high
marginal product. The test of causality reveals a two-way causation between growth and investment in
telecommunications infrastructure.
That is to say that the role of telecom investments is not solely an engine of growth. The mutual interdependence
between economic growth and investments in telecommunications can be interpreted by that this infrastructure has on
one hand been successfully accommodated to satisfy the growing economy and on the other hand facilitated future
growth in a relative high-income country like Finland. This complementary to the contributions of Madden and
Savage (1998) and in line with the results of Canning (1999) and Röller and Waverman (2001), our results suggest
that effects of telecommunications investment do not disappear as the income level of an economy raises
The discussion of alternative ways to model the effect of telecom infrastructure provides a complementary amended
cost-function approach with which the benefits and optimal size of telecom infrastructure can be determined.
Keywords: Telecommunications, economic growth
JEL-classification: D20, L96, O40,
22
ITI1.2 Andrzej Cieślik , Magdalena Kaniewska, Department of Economics, Warsaw University, Poland
Telecommunications Infrastructure and Regional Economic Development: The Case of Poland
In this paper we study the relationship between the provision of indirect production inputs and the level of income
using Polish regional data for the 1990s. In particular, our attention is devoted to telecommunications infrastructure.
The empirical evidence we assemble in this paper confirms that there is a two-way causality between telephone
density and the regional level of income in Poland. This makes us think that telecommunications policy should be
viewed as an important part of a broader regional policy aimed at reducing spatial income disparities. We can also
expect that with EU expansion on the horizon the harmonization of Polish telecommunication law with the EU
regulations should contribute to a more even regional development in Poland.
JEL Classification Codes: R53, L96, O18
Key Words: Telecommunication Infrastructure, Regional Income Disparities, Law Harmonization, Universal Service,
European Union, Accession.
ITI1.3 Hans Schaffers, Telematica Instituut1, Patrick Strating, Telematica Instituut, Erwin Bleumink, Stratix
Consulting Group, Holland
Shaping the Future of Telecommunications: The Role of Scenarios in Developing Telecommunication
Infrastructure Policy
Telecommunications infrastructure policy is shaped in a dynamic environment characterised by uncertainty and
complexity. Policy makers need instruments to structure this environment, to develop options for choice and to
develop support for decision-making. Scenario exercises play a two-sided role in policy support. Scenarios bring
structure in the decision environment and in options for choice. Additionally, scenario exercises are processes
bringing together relevant actors and interests in a forum for discussion and debate. This paper investigates the
potential role of scenario exercises in policy development on the basis of a case study. It is described and analysed
how a scenario exercise recently was designed and carried out for the purpose of supporting telecommunication
infrastructure policy in the Netherlands. The conclusion of the paper is that if designed and implemented carefully,
scenario exercises are a valuable instrument to structure the external policy environment and to identify and analyse
options for decision, as well as to stimulate strategic discussion among actors and thus to create commitment.
Additionally, the scenario exercise has a potential to supplement and enhance the current process of
telecommunications policy development, providing opportunities for a more interactive and society-oriented way of
working. Interactivity in policy development enables the interrelation of different and normally separated elements of
the policy cycle: foresight and studies, situation analysis, policy development, policy implementation and control.
Scenario development as an interactive user oriented process thus could help integrate the different elements of policy
processes in one context.
JEL: L96, D80, O33, O21
Keywords: Industry Studies, Telecommunications, Information and
Uncertainty, Technological Change, Planning and Policy
1
. This paper is based on results of the SPECHT project (Scenario Planning Electronic Communication) funded by the Ministry of
Transport Public Works, Directorate General of Telecommunications and Post (DGTP). The authors acknowledge the valuable
contributions of all participants to the SPECHT project.
23
ITI1.4 Johann Günther, Donau-Universität Krems
The new mobility of our society: caused by telecommunications
1. Cyclical changes
People have always been mobile. In the middle age masses moved because of pilgrimages, today they are called
holiday travellers.
People were never mobiler than today. Because of the increasing prosperity and the abolishment of many borders in
Europe „freedom“ appears as a new symbol. Freedom leads into movement. We have to overcome the removed
barbed wire borders.
Our economy needed the separation of work and therefore more mobility - of goods and managers.
Moreover, liberalized markets designed a „global village“. In the 21 st century the global economy will be dominated
by three key industries:
telecommunications
computer technologies and
tourism.
The development of a knowledge society means more spiritual and moral aspects in our behaviour. A change which
cannot be valued at the present time. Our lives are too short to calculate the future effects.
2. Changes in communication
At the beginning of the 21st century we are confronted with enormous cultural changes. It can compared with the
ancient greek 500 BC. The change of “speaking culture” to “writing culture” 2. Nowadays the “multi-media culture” is
emerging. Communication has more levels.
The changes in absorbing knowledge can be valued. In industrialized countries – countries with certain learning
methods – this values are rising in the case of intelligent tests.”
Also life styles are changing because of increased mobility. Thus leading to individualization trends with the demand
for:
 here ( wherever it is)
 now (nowbody wants to wait)
 for me (not forced to share something with somebody)
3. Shift of Skills
Years ago managers dictated and secretaries typed the letters. Nowadays, with the assistance of computers many
managers type their letters by themselves. Secretaries are no longer „typists“ they can assume further duties. The
manager is his own typist.
These changes happens unspectacular and without announcement. If a manager would announce the dismissal of all
secreataries protests will follow. It happens like the abolishment of servants. Washing machines, vacuum cleaners and
modern kitchens easier the house work.
Traditional teaching means that the teacher prepares facts and figures. By means of the new medias research work for
learning can be passed over to the students. The students reports what the have read and the teacher interprets it and
coaches the class.
In addition, a further change in our society should be mentioned. At the end of the 20 th century we were standing in
front of great cultural changes. At the beginning of the 21st century we are confronted with enormous cultural changes.
It can compared with the ancient greek 500 BC. The change of “speaking culture” to “writing culture”. Sokrates (469399 BC) wrote down nothing. For Aristoteles (384-322 BC) writing was usual. “Sokrates liked to talk and not to
write, his ideas were written down by his student called Plato.”
Today, the revolution means the change of “writing culture” to “multi-media culture”. Communication has more
opportunities.
Technologies as voicemails, mobile boxes and videoconferencing are bringing along new communication methods.
And they are quicker.
Business will be done in a quicker way. New technologies like voice-mail, voice recognizition and videoconferencing
will enable the transfer of information on an oral basis. The qualification of the manager will be measured by his style
of presentation. „The people who can write brilliantly are in the driver’s seat right now. In the networked world, they
will be less dominant and less relevant.“ Written messages can be read as often as the addressee wants to read it. In
the case of oral communication the message must be clear and simple. The addressee has no time to think about it.
New medias, computer and communication technologies are changing our society, our relation to these tools and our
methods of education.
4. Change of Society
The percentage of old people in developed countries is rising. In Germany, more than 50 % of the population will be
older than 50 years in 2030.
The basic question is, how can a society with a majority of old people be further innovative?
2
Sokrates has written nothing; Aristoteles has written everything
24
Until today the young generation was the majority and put pressure on cultural evolution and changes. Is it possible to
remain the level of innovation in a society with a minority of young people?
The proportion of women is increasing in the Western countries. More than 50% of the population in Europe is
female. Therefore, more female labour force is available. More mobility is competing with the situtation of a family,
where both partners are working. It is a problem if both partners want to make their own career. (“two-careersfamilies”).
5. Intensive communication
The advertising consumption in the United States doupled in the second half of the 20 th century:
Time
Media consumption
spots per day
in hours/day
1942-1964
4.4
76
1987-2000
9.0
150
source: Advertising consuption U.S
Average values for Americans
Advertising Research Foundation
But new medias are not replacing the old medias.
Norwegian has the highest internet density and at the same time the highest rate of newspapers and books read. It is
more like “new medias are completing and promoting traditional medias.”
There are existing mixed couples of acceleraters and deceleraters – managers and housewives.
This effect will continou in the future. Marriages between people with different religions and different opinions.
25
Country Case Studies (2 Sessions) – C2
C2.1 Johannes M. Bauer, Associate Professor, Department of Telecommunication, Michigan State University
Regulated Mixed Firms The Case of European Telecommunications
During the past two decades, liberalization, privatization, and the establishment of independent regulatory agencies
transformed the European telecommunications industry from dominance of state monopoly to a more market-based
environment. In several countries liberalization and regulatory reform proceeded at a faster pace than the
privatization of public telecommunications operators resulting in the emergence of a largely untested institutional
arrangement: regulated public and regulated mixed enterprises, jointly owned by the government and private
shareholders. In some countries, partially privatized public telecommunications operators (PTOs) were created to
assure direct government control over telecommunications networks during a transition period to competition. In other
cases they emerged as a result of delayed privatization, often due to poor conditions in the capital markets.
Nevertheless, mixed firms have turned out to be quite persistent and need to be reckoned with.
Mixed regulated firms raise several unique issues, two of which are addressed in this paper using the example of the
European telecommunications market. The first aspect is the role of mixed enterprises in an era of increasing trust in
competition and market forces. Are mixed enterprise remnants of times when they were considered vehicles of
government policy to achieve goals unattainable through legal or regulatory measures? If this is the case, and the
public sector does interfere with management decisions, what are the results? The second aspect relates to the
interaction between regulation and mixed enterprises. Does mixed ownership bias regulation in favor of these former
state-owned firms and to the detriment of competitors as some have alleged? Or do regulators, to avoid the public
appearance of improper oversight, adopt measures that are even more stringent and thus potentially disadvantage
mixed PTOs?
To analyze the implications of different ownership regimes and regulation on the decisions of the firm and
performance, we build on a model of managerial behavior first proposed by Williamson and utilized by Eckel and
Vining (1985) to model mixed firms. The model captures the interaction between manager's objectives, competitive
pressures, and the objectives of government. Rather than assume that managers in public and mixed firms are
intrinsically motivated to pursue social welfare goals, as much of the normative literature on public enterprises has
done, the paper assumes that managers in public and private firms have similar motivations and maximize their own
utility. Regulated public, regulated mixed and regulated private firms then are analyzed as three distinct institutional
arrangements.
The model generates a range of possible forms of interactions and only empirical research can create more clarify.
Therefore, the paper proceeds to examine the experience with regulated mixed firms in the European Union. In 1990,
state-owned PTOs provided 63%, mixed public 17%, and mixed private PTOs 21% of all fixed access lines. Ten years
later, this picture had clearly shifted. Full state ownership continued to exist only in tiny Luxembourg. Fully private
PTOs supplied 27% of all fixed access lines and mixed private 18%. In addition, new private market entrants had
captured a small fraction of 3% of the access lines. Despite the decline in full state ownership, mixed public PTOs still
supplied 52% of all fixed access lines. State ownership is less important in the fast growing mobile communications
sector, where private service providers in most countries captured more than half of the total market.
Based on cross-sectional data for the year 2000, the paper performs bivariate and multivariate analyses of the
comparative performance in selected areas, such as retail service prices, interconnection charges, and the number of
access paths. In a bivariate framework, using ownership as the explanatory variable, mixed PTOs typically perform
better than privately owned PTOs but worse than publicly owned PTOs. However, in a multivariate setting, which
allows accounting for other factors that influence performance, this ranking is reversed. Mixed PTOs perform worse
than fully private PTOs and better than fully public PTOs. However, no clear evidence emerges that mixed PTOs
were able to abuse regulatory agencies to bias competition in their favor.
These findings, while based on a small set of observations, could be seen as an indication that regulation is less
effective when applied to mixed enterprises. No significant evidence could be found that mixed PTOs pursue
particular public interest goals that could not be pursued by private regulated firms. Thus, while there is no
compelling reason for accelerated privatization from a competitive point of view, there is also no compelling reason to
delay further privatization.
Keywords: Privatization, regulation, mixed firms, performance
JEL Codes: L96, L51, L33, L98
26
References
Boardman, Anthony E. & Vining, Aidan R. (1991), The Behavior of Mixed Enterprises, Research in Law and
Economics, 14: 223-250.
Boardman, Anthony E. & Vining, Aidan R. (1988), Ownership and Performance in Competitive Environments: A
Comparison of the Performance of Private, Mixed, and State-Owned Enterprises, Journal of Law and Economics,
32(1): 1-33.
Eckel, Catherine C. & Vining, Aidan R. (1985), Elements of a Theory of Mixed Enterprise, Scottish Journal of
Political Economy, 32(1): 82-94.
Megginson, William L. & Netter, Jeffry M. (2001), From State to Market: A Survey of Empirical Studies on
Privatization, Journal of Economic Literature, 39(2): 321-389.
Ros, Agustin J. (1999), Does ownership or competition matter? The effects of telecommunications reform on network
expansion and efficiency, Journal of Regulatory Economics, 15(1): 65-92.
Sappington, David E. M. & Sidak, J. Gregory (1999), Incentives for anti-competitive behavior by public enterprises,
Working Paper, University of Florida and American Enterprise Institute.
C2.2 Nicolae Oaca, PhD, MBA, RomTelecom’s CEO, Bucharest, Romania
Romanian telecommunications are preparing for liberalisation!
This article is a survey of Romanian telecommunications (fixed and mobile telephony, cable T) before market
liberalization. National context (population, GDP, inflation, etc.), as well as preparative for liberalization (potential
competitors, regulatory frame, etc.) is also presented. The charts depict and explain the existing status, as well as
industry trends.
Romanian telecommunications have developed at a slower pace mainly because of monopoly and state ownership,
unable to manage and to finance a sector with a high growth rate. Where competition was permitted results were
outstanding. Presence of domestic and foreign investment funds or operators and their fights for a stake is a proof.
Fixed telephony
Telecommunications infrastructure has developed at slower pace comparing with EU. This is largely due to the fact
that in the past RomTelecom, national telecommunications operator, collected insufficient revenues to maintain the
system properly, because of incoherent tariffs, far lower than necessary to recover the cost of an efficient system.
After a long privatization process started early in 1997, on December 30 th 1998, OTE of Greece paid US$675m for a
35% stake and 16% voting rights, becoming RomTelecom’s strategic partner. The deal valued RomTelecom at some
US$1.93bn or US$540/line. The remaining 65% is owned by Romanian state, but there is a plan for the sale an
important stake. Schroder Salomon Smith Barney, investment bank, was selected to help Romanian State to become a
minority shareholder.
Mobile telephony
Mobile telephony is a clear example of what competition could mean in Romanian telecoms. The launch of GSM
mobile operators (MobiFon and Mobil Rom) in 1997 has created a strong competitive environment with outstanding
results some 3.9 million mobile subscribers by year end 2001, while the growth rate in mobile subscribers - 900% in
1997, 220% in 1998, 110% in 1999, 70% in 2000, and some 60% in 2001 – seems to be among the highest in Europe.
Late in 2001 a new mobile service Zapp Mobile, based on CDMA450 was launched, providing voice and data at
154Kb/s and challenging the existing GPRS services or future UMTS services. Could be this new service an
alternative for UMTS, at least for Eastern and Central European countries and Romania the foothold for CDMA
penetration in Europe?
Cable TV
Romanian cable TV industry has had an outstanding evolution, since its liberalization. With over 3.2m subscribers
(45% penetration in households), Romania is ranked sixth in Europe. The market liberalization planned for 1 January
2003, has triggered a race. The important players already started restructuring process, replacing coaxial cable with
optical fiber and targeting smaller players. Therefore, raising funds seems to be the most important problem, while
foreign strategic partners, investment funds or investment banks are important players in this landscape.
Preparing for liberalization
All competitors are preparing for liberalization. Very soon Romanian ministry of communications and IT will grant
fixed telephony licenses and will establish national regulatory body. Also, UMTS licenses will be granted in 2002.
Alternative infrastructures already are in building, so today they are competing RomTelecom. RomTelecom’s
weaknesses are incentives for newcomers to enter the market. A low penetration rate and a long waiting list are
premises for an emerging market. Add an economy undergoing a restructuring process and hopes for positive changes
in the macroeconomics environment, adhering negotiations with EU being a guarantee. Under these circumstances
demand for telecommunications services would rise steadily. A low penetration rate and a long waiting list could be
incentives for other Operators to enter the market. The main competitors in the liberalized market would be companies
grouped around nuclei generated by national companies with own telecommunications infrastructures.
Key words: telecommunications, alternative infrastructures, liberalization, Romanian telecomms.
27
C2.3 Dr.Sowri Rajan Komandur, Ph.d, Head Telecom Division, Indian Telecommns, India
Telecom issues in India
The Indian telecom scenario has thus undergone drastic and encouraging changes within a short period for the benefit
of the consumer and it can be anticipated that there are going to be even better conditions in the coming future. In this
paper, the present telecom scenario and the future developments are discussed.
The tariffs in cellular, domestic long distance and now international long distances have tumbled over the past year.
Competition is going to intensify further as the new entrants try to grab market share. On April2,, the last bastion of
monopoly in telecommunications in international long distance telephony fell. That was the end of VSNL’s
monopoly and also opening up of or legalisation of internet telephony. It is expected that this attractive segment will
see a rush of companies trying to woo Indian telecom consumer. The BSNL(Govt. owned) has already announced 20
percent cut in long distance rates.
The communications industry in India will be touching about 70,000 crore Indian ruppes. It is estimated that the
growth is about 15 percent over the last year.
It is explained in this papers various options available to customers in India. The various objectives of the DOT, of
Govt. of India which became a corporation by name BSNL in October 2000 are discussed. Also the perfomance of
other leading basic service providers like MTNL, Hughes telecom, Tata Teleservices is discussed.
Also various technology options now available in India for international connectivity services are discussed. The
corporates world wide get international connectivity through international private leased circuits(IPLC), frame relay,
IP-VPN and ATM. In India this was limited only to IPLC and frame relay. But now since other private operators like
Bharati, reliance etc are offering services in all segments without restricting themselves to IPLC and frame relay. All
the major tier-I world carriers like cable and wireless, BT, AT&T, world com etc are providing presently services
through VSNL.
The different types of broad band equipment to provide broad band services is an important criterion. In the old days
the telecommunication policy makers all the world over are worried about things like long distance, telephone calls,
cost of international calls, whether everyone had a phone to make a local call. Today everyone talks about broadband.
In the beginning broadband is simply highspeed access to internet. Now a days ubiquitous broadband service is the
hot subject.
C2.4 Rajni Gupta, Doctorate from Faculty of Law, University of Toronto,
Telecommunications Liberalization Process of India: A Success Story Unfolding in
New Decade of the 21st Century?
India in 1991, departed from a closed economic structure to an open economic model. The same was reflected in its
telecommunications sector. However, the government took a half-hearted approach in the first round of reforms and
failed to put together a proper legal and regulatory regime to suit the competition process. This led to an epic legal
battle between the incumbent, entrants and the regulatory body. Lack of support from the judicial institutions virtually
made the regulator's role redundant. This paper will briefly discuss the initial problems of deregulation of the industry
to show that it is critically important for political institutions to commit and implement pro-competitive market
principles in a fair and transparent manner. The paper will describe failure of the 1994 Telecom Policy on the one
hand and the success of the information technology industry on the other, led various actors to pressure political
institutions to undertake initiatives to untangle the problems. The paper at length would discuss the initiatives
undertaken by the government to remove the obstacles and to expedite the reform process.
The 1998, Internet Policy will be discussed to show that with no license fee or restriction of number of licenses to
be issued. The government has issued more than 400 licenses. Various domestic and international investors in
partnership are now extensively involved in offering Internet services and laying infrastructure.
The new 1999 Telecom Policy will be discussed to show that the policy allowed more competition in various
services such as basic, long-distance and cellular services. In 2001 the TRAI Act of 1997 was amended to overhaul
the regulatory framework and to clarify the role of the regulator.
In implementing the 1999 policy, the government corporatized the service arm of the incumbent, Department of
Telecom (DOT ) by creating a new company BSNL. The government has privatized its international long-distance
carrier (VSNL) by selling its 26 percent of its equity.
Accepting regulator's (TRAI) recommendations to allow unlimited competition in basic, national and international
long-distances services, introduce a fourth cellular -mobile operator in each state and allow ISP's to offer Internet
telephony, the government is the process of issuing licenses for various services.
28
With all the segments of the industry open for competition. The Indian telecom sector is said to be the fastest
growing industry in this decade. Consolidation of the industry, and with competition among private and government
operator's, rates of various services are rapidly falling by 40-70 percent. The first private company Bharati
Enterprises has also successfully completed its IPO by selling 10 per cent of its shares to the public and has collected
$1.73 million. The government is the process of repealing all the old telecom laws and replacing them with a
comprehensive new statute.
All these initiatives undertaken by the government in partnership with various public and private interests groups is
proving to be in the public interest and are clearly addressing the divide of the have and have not by offering both
traditional and broadband services and infrastructure.
C2.5 Rekha Jain, Indian Institute of Management, Ahmedabad, India
Indian Cellular Licensing: Lessons from Experience
With private initiatives increasing in telecom and broadcast service provision, demand for spectrum has increased.
Digital technology has increased the scope of applications and created new areas of service provision. Cellular
telephony and wireless Internet are examples of such services. Despite technological changes that reduce the demand
for spectrum, availability of spectrum continues to be a constraint. In order to allocate spectrum amongst competing
service providers, regulatory agencies use several mechanisms such as comparative hearings or beauty parades,
lotteries or auctions. All these methods had been used by the Federal Communications Commission in the past before
adopting auctions as the chosen mechanism for future licenses.
From the regulatory and policy perspective, spectrum auctions ensure efficient usage by allocating it to those entities that
value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes as, for
example, when regulatory agencies have inadequate market information. There may be a mismatch between expected and
actual bidder behavior, or auctions may be poorly designed. The key challenge before regulatory agencies is to design
auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders
can effectively use the spectrum for their business.
Past experience of auction design from different countries such as USA, UK, India illustrates the need to not only
understand the theory of auctions to enable efficient designs but also to incorporate multiple criteria both from the
perspective of the bidders and the government. For example, the bidders may wish to have flexibility that allows
aggregation as a part of the design while governments may wish to incorporate fulfillment of the public service regulation
as a design component.
While auction design issues is critical for successful assignment of licenses, an equally important aspect is the
management of the post auction processes. Even the most carefully designed auctions have had some problems in the post
auction phase. Regulators need to be able to deal with the emergent issues. For example, the FCC had to give away the
spectrum to the minority owned businesses under more liberal terms than what was originally bid for. In India, several
states had no bidders at the end of the bidding process, possibly due to the inappropriate design of the bidding units.
This paper would analyze the Indian cellular licensing in the context of experiences of several other countries including the
USA and the UK, and consider the possible solutions, the impact of various design elements on bidder behavior and the
management of the post auction phase to draw implications for future designs.
The JEL codes are: K23, N55 and L96
Keywords: Spectrum, auctions, cellular, India
29
C2.6 Turid Birkenes, M.A. in history, cand. philol, Jan-Petter Saether, M.Sc., cand. oecon Norwegian Post and
Telecommunications Authority, Oslo
Enabling customers to enhance telco market competition
In both Europe and the US telecommunications acts have a joint goal of ensuring business and residential customers a
variety of good quality services, and at a low price, through effective competition. A prerequisite for an effective and
competitive market is adequate and sufficient information. In order for customers to be able to compare the qualities
of the various products to make best buy choices, they need relevant product and price information. This will in turn
influence the providers to supply services that give high user value at a low price. Well-informed customers will also
indirectly, through market dynamics, support innovative product development on the supply side. Therefore,
information is crucial. The core issue in our paper is whether the regulator can support custormers in making better
choices, and thereby influence market dynamics.
Modern economic literature and research highlight the fact that financial markets are characterised by
insufficient and incomparable information. The cost of information retrieval is huge, and the learning effect by
repeated transactions is minimal. The markets for supply of electric energy, and probably to a much higher degree, the
telecommunications markets, possess the same characteristics.
On this background, the Norwegian Post and Telecommunications Authority (PT) think that great importance
should be attached to consumer issues. "Tricks" like different and complicated tariff schemes and charging principles,
programmes for locking in customers, loyalty programmes and bundling of various products and services, are all used
by telecommunications providers in order to hamper customers in making better choices. The consequences are that
customers make less effective choices, and thereby loss of welfare.
Previously, the regulator has, for the most part, focused on the operators and the supply side, e.g. by
establishing number portability arrangements, carrier pre-selection, local loop unbundling, etc. Less effort has been
made in order to enable consumers to get correct and timely information in such a manner that they will make better
choices. There is reason to believe that more demanding customers may also move telecom operators to shift from
confusing pricing schemes to better services.
One "fumbling" attempt from the PT in approaching the consumers, is establishing an interactive price guide
on the website. The guide will - inter alia - give consumers the possibility to compare the prices and terms of the
various telecom companies regarding fixed network telephony, mobile telephony and internet services. When the PT
announced the plans for the guide to the providers in January this year, one of the larger Norwegian telecom operators
reacted by threatening to alter their charging schemes in accordance with that of its worst competitor. This would in
turn be very unfavourable for the customers. The counteraction of the PT was to impose a decision upon the other
operator in order to make its charging principles more customer-friendly. We will elaborate further on this case in the
paper.
The example illustrates that a shift of perspective from the provider to the consumer might turn out to be a real
challenge. And for a long time, it will be necessary to supervise and regulate the supplier side in addition to try
helping consumers to make the best choice.
A dilemma for the regulator is whether the steps taken will help or hurt? Our preliminary conclusion is that the
regulator still needs more knowledge about the suppliers - which the above-mentioned example also quite clearly
illustrates. And it illustrates that the regulator needs to be active beyond the suppliers. In the paper, we will also draw
lines to some of the other European telecom markets.
JEL codes: L96, L15
Keywords: telecommunications, consumer information
30
C2.7 Per Högselius, PhD student, Systems of Innovation Research Programme (SIRP), Department of Technology
and Social Change, Linköping University, Sweden
Telecommunication in Estonia: the Makingof a Sectoral Innovation System
The Estonian telecommunications sector has historically developed in dramatically varying political-economic
environments. This paper focuses on technological change and innovation in the sector from the 1980s until today,
that is, the transition period in which Estonia emerges as a (re)independent country. The paper studies the emergence
of a surprisingly dynamic telecommunications sector in this period. New empirical material is presented and analysed
using a 'sectoral innovation systems' approach. The paper follows the historical process through which private
companies, government bodies, universities and other organisations create and destroy relationships to each other and
thereby transform the sector.
The empirical part of the paper consists of three sections, corresponding to three phases of the Estonian developments.
In the first phase, which captures the late Soviet period, innovation in Estonian telecommunications is seen to be
inhibited by the general characteristics of the Soviet system of innovation as well as by severe underinvestments (in
relation to other sectors). A steady growth of the Estonian telephone system can be observed, but the forms of learning
occurring in the sectoral innovation system are non-dynamic. The innovative activities that are relevant for Estonia
take place outside Estonia itself, with the exception for a local project-construction bureau with the purpose to assist
in network expansion. Estonia has also some relevant manufacturing capacity, which however is isolated from the
network operator.
In the second phase, representing a transition and reorientation towards the West, the Estonian sectoral system of
innovation in telecommunications is heavily influenced by the new freedom to choose suppliers and partners. Strong
linkages to Sweden and Finland emerge, whose dominant network operators enter Estonia as strategic investors.
Accordingly, international transfer of knowledge and technologies plays a decisive role. On the manufacturing side,
existing Estonian capacities are channelled into subcontracting relations with Ericsson, Nokia and other large Western
manufacturers. However, service provision and equipment manufacturing are sub-sectors that remain isolated from
each other in Estonia.
The third phase is dominated by the sub-sectors mobile telephony and the internet. Whereas in the second phase the
most important inter-firm linkages were mostly international, they are in the third phase domestic. Domestic network
operators focus on the development of new services in collaboration with domestic software firms, government
agencies, banks, etc. Competition in service provision begins to act as a driving force. The surprisingly dynamic
Estonian telecommunications market also attracts foreign firms who seek to use it as a test market – for example,
Ericsson in new mobile technologies. The market is fully liberalised from January, 2001.
The paper concludes that the making of the Estonian sectoral system of innovation in telecommunications is
characterised by a complementarity between transnational and domestic inter-firm linkages and that Estonian
telecommunications – in a broad sense, including both manufacturing and services – is on its way to becoming a part
of the Swedish and Finnish telecommunications clusters. However, the empirical material suggests that it is not yet
clear to what extent these strong relationships to the Nordic countries on the long term will be beneficial for Estonia's
innovative strength in the sector.
JEL codes for my paper: O30, P23, L96. Keywords: Innovation, Estonia,
31
Broadband Networks (2 Sessions) – B2
B2.1 Johannes M. Bauer, Associate Professor, Department of Telecommunication, Michigan State University
Ping Gai, Ph.D. student, Department of Telecommunication, Michigan State University
Thomas A. Muth, Professor, Department of Telecommunication, Michigan State University
Steven S. Wildman, James H. Quello Professor of Telecommunications Studies, Department of
Telecommunication, Michigan State University, USA
Foundations of Broadband Policy
In its survey of the state of broadband deployment, the OECD (2001) found significant differences among its member
states. In the United States, measures to facilitate advanced telecommunications technologies have enjoyed high
priority since the Telecommunications Act of 1996. However, it is disputed whether the government should play any
active role in facilitating broadband investment or simply create an environment in which market forces can unfold in
an unfettered manner. This paper provides a framework within which these questions can be answered in a more
coherent fashion. It builds on a report by the Computer Science and Telecommunications Board (CSTB 2002) of the
U.S. National Research Council. While it focuses on the United States, its insights can be generalized for other
nations.
The Computer Science and Telecommunications Board, in its report “Broadband: Bringing Home the Bits” reviewed
public policy issues raised by the deployment of broadband networks and services. Given the complexity of factors
influencing broadband deployment and the resulting uncertainty with regard to the pace of broadband diffusion, the
report recommended caution, an assessment of the effectiveness of policy options, and policy designs that reduce the
risk of unintended and undesirable consequences. These include “demand stimulation and aggregation, grant and loan
programs, and municipal initiatives fostering market entry and competition” (CSTB, 2002, 206). Moreover, the report
explored the potential role of local initiatives in broadband policy.
Our paper first provides an extensive review of current research on the claimed benefits of broadband networks and
services. Recurring benefits of broadband are identified in education, health care, business infrastructure, government,
and civic life. Our survey reveals that the potential benefits of broadband depend on a multitude of demand and
supply as well as location factors. Therefore, in those cases where specific policy intervention may be required, it will
have to be designed in a multi-tier fashion, reflecting the national, regional and local dimensions of broadband
networks and services.
Second, we explore the nature and geographic scope of the claimed benefits of broadband in more detail. We find that
some effects of broadband are private goods, some can be characterized as club goods, and yet others are public
goods. From a spatial perspective, effects can materialize locally, regionally and nationally. We also find situations in
which improved broadband access may cause local costs, for example, through a net shift of local business revenues
to distant suppliers and locations. In situations where the effects of broadband reach beyond a local market,
communities will inevitably be affected by the strategies adopted in other places. Broadband deployment may become
a necessary condition to avoid stronger disadvantages but may not be a sufficient condition to secure local prosperity.
Third, based on this differentiated analysis, we discuss the conditions under which market forces will be insufficient
for broadband deployment. We show that public policy responses will have to be tailored to the spatial and product
characteristics of broadband services. In the case of predominantly private benefits, the role of the public sector will
best be focused on measures facilitating demand synchronization and aggregation. Where the mix of benefits of
broadband services is slanted towards club goods or public goods other means might be more effective, including
public funding or even direct provision. We conclude the paper with a review of the present system of policies
towards broadband at the national, state, and community level. Evaluating the existing policy portfolio against our
conceptual framework for optimal policy design we find serious shortcomings and suggest alternative approaches.
Keywords: Broadband, broadband policy, community networks, externalities, public goods, club goods, private
goods
JEL Codes:L96, L86, L5, R58
References
Bar, Francois et. al. Access and Innovation Policy for the Third-Generation Internet,” Telecommunications Policy,
24(6-7): 489-518.
Computer Science and Telecommunications Board (CSTB). Broadband: bringing home the bits, Washington, D.C.:
National Academy Press, 2002.
Faulhaber, Gerald R., Hogendorn, Christiaan. The Market Structure of Broadband Telecommunications,” Journal of
Industrial Economics, 48(3): 305-29.
Hausman, Jerry A., Sidak, J. Gregory, and Singer, Hal J. “Cable modems and DSL: broadband Internet access for
residential customers,” American Economic Review, 91(2): 302-07.
Organisation for Economic Co-operation and Development (OECD). The development of broadband access in OECD
countries, Paris: OECD, 2001.
32
B2.2 John Haring, Jeffrey H. Rohlfs & Harry M. Shooshan, Strategic Policy Research, Inc., USA
Propelling the Broadband Bandwagon
This paper offers an economic assessment of basic conditions of supply and demand influencing the pace of
broadband deployment and take-up in the United Kingdom and elsewhere. It concludes that broadband is today
primarily demand-constrained rather than supply-constrained. Current broadband technologies (primarily DSL and
cable-modem) offer transmission speeds adequate to meet requirements for most of the potential broadband
applications now contemplated for the medium-term future.
In analyzing the prospective demand for broadband, we model the economic analysis of technology diffusion.
We focus on the ways in which basic economic conditions of supply and demand influence the rate at which new
technologies spread through the economy. We identify a variety of specific influences that constrain or propel the
pace at which new technologies are adopted by relevant economic actors. Supply-side influences include such factors
as the amount of productive capacity and input requirements in terms of specialized resources, the nature and specific
identity of relevant government regulations, and the degree of industry structural concentration and vertical
integration. Demand-side influences include such factors as ease and net benefits of adoption and the existence of
bandwagon and other types of consumption or network externalities.
This paper posits that broadband Internet access is subject to what economists call “bandwagon effects.”
Bandwagon effects are benefits that a person enjoys as a result of others’ consuming the same product or service that
he or she does. There are two types of bandwagon effects relevant to broadband take-up: network externalities and
complementary bandwagon effects. Network externalities are benefits that users derive from being able to use a
particular service to communicate with other persons. Complementary bandwagon effects refer to the increased
supply of complementary products (service applications) as the user set expands.
The use of broadband communications to enhance narrowband Internet applications is potentially subject to both
network externalities and complementary bandwagon effects: both the value and supply of broadband applications
are likely enhanced as the broadband user set expands. Bandwagon effects are potentially quite important because
they set the stage for dynamic network growth—“positive feedback” and service “takeoff” in the terminology of
bandwagon economics. Demand is a “value-for-money” proposition, but given bandwagon effects, value is also,
simultaneously, a demand proposition. Thus, increases in the demand for broadband increase the value of broadband
(as the user set expands), but increases in the value of broadband also increase the demand, resulting in creation of a
positive feedback loop that could conceivably lead to higher and higher demand and increasing economic benefits.
Broadband is currently a “niche” service that has not achieved “critical mass” sufficient to induce this kind of
positive feedback and service takeoff. The service’s current applications and costs have as yet failed to produce
spontaneous creation of new demand-increasing applications on a significant scale. Thus, high-definition web pages
are not in widespread use, in part, because the set of users is small, while the set of users is small, in part, because of
the limited availability of high-definition web pages. Increases in supply and demand may eventually solve the
problem by inducing sufficient subscribership to produce feedback in the supply of complementary applications.
Downloading of music and video files may ultimately be the “killer application” for broadband that will produce
critical mass, positive feedback and service takeoff, but development of these applications is currently being frustrated
by the difficulty and inability to resolve digital copyright problems.
JEL: H2 Taxation, Subsidies, and Revenues
Keywords: Efficient Pricing, Network Externalities
L5 Regulation and Industrial Policy
33
B2.3 Margit Vanberg, Zentrum für Europäische Wirtschaftsforschung GmbH, Mannheim, Germany *
Competition in the German Broadband Access Market
The increasing employment of information technologies in the economy has lead to a heightened demand for
advanced communication capabilities. Key technological progress has emerged in the field of broadband internet
access3. Many new internet services (e.g. video streaming, video on demand, audio content in digital quality and
video-conferences) already make use of the higher transfer speeds attained by new technologies. Naturally, their
success depends on a wide deployment of broadband infrastructure among users. Thus, the innovative broadband
technologies and broadband applications are adding a new aspect to the debate on local network competition. The
crucial question is, whether the possibilities to get access to broadband internet capabilities are keeping step with the
applications developed for this medium. A recent OECD report states: ”The current bottleneck to growth in the
communications sector, and beyond for areas such as electronic commerce, is the limitations of local access
networks.”4
In Germany telecommunications industry representatives and policy makers are debating the question whether
the broadband internet access offer of the German incumbent carrier Deutsche Telekom (DTAG) has enabled DTAG
to monopolize not only the market for broadband internet access but has actually resulted in a factual remonopolization of the local loop by DTAG. The alleged monopolization would most probably hinder a quick
deployment of broadband capabilities. Against the background of this discussion, the proposed paper examines the
current developments in high speed internet capabilities in Germany and the state of competition in this market.
Furthermore, the paper evaluates existing regulations and their impact on broadband deployment, and discusses
options for future broadband policy that may further competition in this market.
To provide a benchmark for assessing the broadband development in Germany, the paper gives a short
overview of the broadband access development in other EU and OECD countries. A survey of the current state of
competition in the German broadband access market follows. The focus will be on offers by independent network
operators (facilities-based competition) as well as offers by competitors making use of unbundling or line-sharing
agreements to access the existing network of the DTAG.
The most prospective candidate as an independent network capable of generating facilities-based
competition in Germany is the cable-broadcasting network. While other alternative technologies in the local loop
have thus far failed to succeed, it is hoped that this network can support economically viable alternative
telecommunications and internet services on a widespread scale. 5 The current developments in the cable broadcasting
network and the expectations for its success in the short to medium term therefore need to be evaluated.
At this time, the only noteworthy competition in the broadband access market stems from new entrants
relying on regulation of the DTAG to open its network to competitors. However, the market share of these
competitors has been stagnating on a rather low level. The impact that past regulatory policy, especially unbundling
and line-sharing regulation, has had on this problem shall be evaluated. The insights attained by the survey of the
current developments in broadband competition shall finally be used to draw conclusions for future broadband policy.
Bibliography items
Jean-Jacques Laffont, Jean Tirole (2000), Competition in Telecommunications, MIT
Press.
National Research Council (2002), Broadband: Bringing Home the Bits, Computer
Science and Telecommunication Board, National Academy Press, Washington DC.
OECD (2001), “The Development of Broadband Access in OECD Countries”, OECD:
Paris.
Squire, Sanders & Dempsey L.L.P. (2002),” Legal Study on Part II of the Local Loop
Sectoral Inquiry”, study prepared for the European Commission and the EFTA Surveillance Authority,
http://europa.eu.int/comm/competition/antitrust/ others/sector_inquiries/local_loop.
Glenn Woroch (2002), “Local Network Competition”, in Martin Cave,
Sumit Majumdar and Ingo Vogelsang, editors, Handbook of
Telecommunications Economics, Elsevier Publishing, forthcoming.
Keywords: broadband access, local network competition, regulation
JEL Classification: L43; L50; L96
*
Center for European Economic Research (ZEW), Research Group Information and Communication Technologies, P.O.Box 10 34 43, D-68034
Mannheim, Germany
Ph.: +49/621/1235-351, Fax: +49/621/1235-225
E-mail: vanberg@zew.de
The term “broadband” is used in accordance with the OECD definition of broadband access. The OECD defines broadband as a downstream
connection exceeding 256 Kbps and an upstream connection of at least 64 Kbps [OECD (2001), p. 6]. This allows the inclusion of the basic DSL
offers of most DSL providers in OECD countries, which will typically be used by private consumers and small businesses.
4
OECD (2001), p. 4.
5
It is not the subject of this paper to discuss the possibility of competition in local voice services via cable, nevertheless the possibility of
infrastructure competition through the cable network is obviously just as interesting for voice services as it is for internet access.
3
34
B2.4 Julián Seseña, Teledesic Communications, Spain
Broadband Infrastructures: Satellite or Terrestrial deliver? Multimedia by Satellite
This paper addresses global satellite systems which are being developed to meet the growing demand for broadband
communications, and the regulatory framework conditioning this development. Non-geostationary orbit satellite
systems have emerged in the last few years as the most attractive option for providing really global access and the
highly desirable seamless compatibility with terrestrial networks. Geostationary satellite systems and terrestrial
options for meeting broadband requirements are also examined.
While years ago, a niche of fierce competition between Geostationary and Non-Geoestationary satellite systems was
envisaged, both options are becoming to realize themselves on their mutual complementarity to fully satisfy
customers. The view of the author is that, by the contrary, such a fierce competition in many arenas (regulatory,
political, marketing, commercial, operational) is moving towards a terrestrial/satellite healthy disputes.
1.
Introduction
All market studies point towards a growing demand for broadband communications. As it has happened
before in relation to other scenarios (e.g. direct-to-home transmission of video signals), satellite and terrestrial systems
will be competing for this market in the years to come. Traditionally, this competition has been restricted, on the
satellite side, to geostationary networks. However, non-geostationary orbit (Non-GSO) systems have emerged in the
last few years as an attractive option for providing really global access and the highly desirable seamless compatibility
with terrestrial networks.
This paper reviews the demand for broadband multimedia communications (Section 2), and describes the
main options being pursued to meet these broadband requirements, either using terrestrial systems (Section 3) or
satellite systems (Section 4). Section 5 focuses on a representative example of a broadband non-geostationary
satellite system. Section 6 addresses the regulatory and interference environments where Non-GSO systems are
evolving, and how it shapes system design. Finally, Section 7 presents some conclusions.
B2.5 Jorge Pérez Martínez: Professor, Héctor Pérez Saiz: PhD Stud., Sergio Pérez Saiz: PhD Stud., Universidad
Politécnica de Madrid, Madrid, Spain
The Overregulation of Incumbent Operators and its Impact in the Incentives for the Deployment of Broadband
Networks
Asymmetric regulation is applied in most markets which have been recently liberalized as a normal practice for
encouraging full competition by using a regulatory framework which favor new entrants. Therefore, regulatory
authorities often tend to overregulate the incumbents to obtain this goal by imposing them certain conditions that
could be questionable on a free market basis: local loop unbundling, universal service funding, restrictions in
broadband retail services, etc.
While regulator authorities model markets, certain technologies have reached the critical maturity to be applied in the
markets at large-scale. This is the case of broadband technologies. Following roughly a decade of development and
experimentation and a recent period of rapid growth, first-generation services using primarily cable modems and
xDSL technologies are available in many markets. This progress is offset by recent business failures and uncertainty
about the pace of future investment--factors that in part reflect slow growth in subscriptions for broadband services.
However, broadband has become a priority for the policy makers because it is considered as the key element for
extend information society benefits among the citizens.
However, incumbents argue that the imposition of this overregulation derived from a strict application of asymmetric
regulation policies discourages investments in these new broadband infrastructures. Since incumbents consider
themselves as the only operators capable of deploying broadband networks and services at large-scale, they are
conditioning the full deployment of these services to a less strict regulation.
Due to the relative maturity of the market, the regulation policy is now considering the evolution to a less strict
schema. This is the case of the new European regulatory framework in which there is an evident transition from an exante to an ex-post schema in relevant markets.
In the other side, there is currently a strong lobby pressure in order to modify the current regulatory restrictions to the
national incumbents. The most known example is in USA where Tauzin-Dingell bill (named “Internet Freedom and
Broadband Deployment Act”) pretends to promote broadband deployment eliminating certain Bell’s obligations such
as unbundling local loop. Like in USA, incumbents in the European countries promote also the elimination of certain
regulatory restrictions in order to accelerate the deployment of broadband. It has had recently great effects for the
users, for instance the new ADSL retail service offered by Telefónica in Spain.
Therefore, the aim of this paper is to obtain the impact of overregulation in the development of broadband networks.
The case of the European market will be specially analized. Final conclusions will incorporate recommendations
about the optimal regulation for the development of broadband networks and services and, finally, some alternatives
to the current role of the state for developing of broadband are given.
35
Selected Bibliography
 Baumol, W.J., Panzar, J.C. & Willig R.D.(1982), Contestable Markets and the Theory of Industry Structure
(1982).
 Newbery, D. (1999). Privatization, Restructuring and Regulation of Network Utilities. MIT Press. 1999
 Hall, R.& Lehr, W. (2002). Promoting Broadband Investment and Avoiding Monopoly. MIT Internet and
Telecoms Convergence Consortium.
 Laffont, J.J. & Tirole, J. Competition in Telecommunications. MIT Press. 1999.
 OCDE. (2001). The Development of Broadband Access in OCDE Countries. www.ocde.org
Key Words: overregulation, broadband, deployment, regulation, policy, incumbent
JEL Code:L96, L97, L98, K23, L52, O38
B2.6 Claudio Feijóo Gonzalez, Jaime Castellano Cachero (Politechnical University of Madrid, Spain)
The new making available right: Technical research on artistic fixations and their ways of exploitation
The main goal of this document is the study of different technical processes of exploitation through digital means in
order to clarify the impact of the future making available right 6. Currently, services using these digital means, are
Internet, digital radio and television and mobile communications.
This paper presents the relationships between different technical aspects and business models, showing the key
aspects for artists and performers in order to define an appropriate position to defend their future rights. Main
elements to consider are:
 What transformations suffer a content under a technical point of view in order to be created, fixed, transmitted,
received and/or consumed
 Main technical aspects of digital means where an exploitation of a certain product is done
 How is created added value by every agent that is implied in this process (author, producer, transmitter,
performer)
 How do the consumers use, receive and perceive the contents
 How much do the consumers pay for the different products and services
Note that all rightholders recognised by 2001/29/CE Directive should have an exclusive right to make available to the
public copyright works or any other subject-matter by way of interactive on-demand transmissions. Such interactive
on-demand transmissions are characterised by the fact that members of the public may access them from a place and
at a time individually chosen by them.
Consequently, the impact of this new right will depend on the services included under the term “interactive ondemand transmissions”. In the present paper, a technical classification of the ways of audiovisual content exploitation
is presented in order to show the different services that could be considered as “interactive on-demand transmissions”
(covered by new making available right)
JEL-Code: 034. Intellectual Property Rights: National and InternationalIssues
Keywords: Making available, interactive, on-demand, personalized, unicasting, multicasting
6
See 2001/29/CE Directive
36
Frequency allocation – F1
F1.1 Kim, Kwan Young, Ulanbaatar University in Mongolia
A Study on Management Strategy For Bidding Intention, On Web-Based Auction Site:
Comparative Analysis of Korea and Argentina Case
Web-based auction is familiarized by the help of the Internet which is to be fundamental tool for the E-commerce.
Consumer is given to choose a web-based auction site based on a wealth of online information. With this
circumstance, researchers have focused on the auction model and information content to derive consumer’s bidding
intention and behavior. Web-based auction is shown to the bidders by web interface. Therefore, web-based auction
site’s design factor is regarded as one of the main elements for evaluation of online auction site and differential factor
on bidding intention by national difference. However, little effort has been made in analyzing the relationship between
bidding behavior and design factor of web-based auction site. Besides, none of researches addressed strategy issue by
considering national difference between two nations such as difference between Korea standing for East Asia and
Argentina for Latin America. This paper addresses (1) the relationship between web site design factor and consumer’s
bidding behavior using perception of bidder and (2) difference of bidding attitude/intention of web-based auction
between Korean and Argentina. Web-design factors were selected as following: site architecture, information design
and information content of the web site. Web design factors of web-based auction site are analyzed compared with
perception variables: perceived usefulness of web design and information, and perceived ease-of-use. The national
difference between Korea and Argentina standing for East Asia, Latin America respectively was derived. This
experimental study shows that web-based auction site’s design factors and bidder’s characteristics are positively
related to the attitude toward bidding participation and hence intention for bidding participation in Korea contrary to
Argentina in which web design factors and bidder’s characteristics factors are closely related to attitude but does not
influence on intention for bidding participation in Argentina. In addition, national characteristics between two nations
are shown in terms of approach of management strategy. The state of national E-commerce infrastructure and people’s
perception for online transaction influence attitude and intention on web site transaction. Four hypotheses are derived
as followings: (1) Web design factors positively influence consumer’s perception on website, (2) Perceived website
usefulness positively influence the attitude/ intention, (3) Attitude toward bidding positively influences intention of
bidding participation, and (4) Bidder’s characteristics influences the attitude/intention. Results of test are shown that
all hypotheses are partially accepted except hypothesis of 3: Attitude toward bidding participation positively
influences the intention for bidding participation. On the other hand, hypothesis 3 is accepted in Korea but rejected in
Argentina. This paper explains the reason why attitude toward bidding participation does not influence positively
intention for bidding behavior in Argentina. Further, this paper gives us chance to derive the implication about
management strategy for online auction site in the field of E-commerce.
Keyword: Management Strategy, Web-based auction, Internet Auction, Online Auction, Electronic Commerce,
Bidding Intention
37
F1.2 John Scott, Marloes van Caspel, David Cleevely, and Graham Johnson.
“Frequency Assignment Methods: Opportunities (and Pitfalls) For Regulatory Authorities”
The paper, which is based on research carried out in the latter part of 2001 and the first part of 2002, addresses three
main areas:
 an analysis of the characteristics of various spectrum assignment mechanisms
 relationship between application characteristics and assignment mechanisms
 analysis of regulatory objectives.
Characteristics of spectrum assignment mechanisms
Mechanisms for the assignment of spectrum must be evaluated in the context of what would constitute a ‘successful’
spectrum assignment. Three distinct criteria are considered:
 economic efficiency i.e. the degree to which spectrum is given to those parties that value the spectrum most
highly
 process equity i.e. the fairness of the distribution of benefits arising from the spectrum assignment
 political factors i.e. main political policy objectives that are being pursued within the assignment process.
It is within this context that we characterise the following different mechanisms:
 spectrum auction, which uses a market-based mechanism to award licences to the highest financial bidders
 ‘beauty contest’, where spectrum licences are awarded to the bidders that best satisfy some pre-determined
strategic priorities identified by the regulator
 lottery, where spectrum licences are randomly awarded by drawing lots
 first-come, first-served (FCFS), where spectrum licences are awarded based on speed of application
 unassigned spectrum, where no property rights over unassigned spectrum are granted to any user; spectrum can
be freely used by any user and no operating licence is required.
In addition, the impact of introducing spectrum trading in a ‘secondary’ market are considered in relation to each of
the different primary assignment mechanisms described above.
A summary of the factors that appear to influence the selection of the different assignment mechanisms, together with
the potential impact of a secondary market, is summarised.
Relationship between application characteristics and assignment mechanisms
In order to evaluate the relationship between a particular application (i.e. the purpose designated for a particular
spectrum allocation) and the assignment mechanisms used, the paper seeks to determine whether there is any
correlation between assignment mechanism selections and two aspects of an application:
 the technical characteristics of an application
 the economic characteristics of an application.
The evaluation of the technical characteristics of the various applications entails a comparison of such features as
network and user terminal characteristics, the required bandwidth and the feasibility of spectrum sharing. The
applications studied are as follows:
 GSM
 UMTS
 broadband fixed wireless access (BFWA)
 terrestrial broadcast television.
Similarly, a variety of economic factors surrounding the assignment of a particular application are be analysed.
Analysis of regulatory objectives.
The regulatory objectives behind nine separate auction and beauty contest assignment processes are analysed. These
analyses will focus upon two key aspects of the assignment:
 The relationship between the aims of the regulator and the assignment mechanism used.
 The degree of success achieved in the assignment process when compared to the regulator’s original stated
objectives.
Building upon the previous analysis, the aims of the regulator are explored using the following criteria:
 economic efficiency
 process equity
 political factors:
38
F1.3 Rekha Jain, Indian Institute of Management, Ahmedabad, India
Cellular Licensing in India
Digital technology and private participation in services have increased the demand for spectrum by creating new
applications such as wireless Internet. However, despite the technological changes that reduce the demand for
spectrum, availability of spectrum continues to be a constraint. In order to allocate spectrum amongst competing
service providers, regulatory agencies use several mechanisms such as comparative hearings or beauty parades,
lotteries, and/or auctions. For example, the Federal Communications Commission (FCC) had used all these three
methods in the past before adopting auctions as the chosen mechanism for future licenses.
From the regulatory and policy perspective, spectrum auctions ensure efficient usage by allocating it to those entities
that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes as,
for example, when regulatory agencies have inadequate market information. There may be a mismatch between
expected and actual bidder behavior, or auctions may be poorly designed. The key challenge before regulatory
agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time
ensuring that bidders can effectively use the spectrum for their business.
While the simplest auction design involves single round, highest bidder, “winners curse” could lead to high bids and
subsequent inability of the winner to provide services. Second price auctions may have to deal with the implications
of revealing the highest price but having to accept the second highest bid, if the price differential is significant. Thus,
there is a need to be able to have efficient designs that attempt to incorporate multiple criteria both from the
perspective of the bidders and the government. For example, the bidders may wish to have flexibility that allows
aggregation as a part of the design while governments may wish to incorporate fulfillment of the public service
regulation as a design component.
An important aspect in auction design is the management of the post auction processes. Even the most carefully
designed auctions have had some problems in the post auction phase. Regulators need to be able to deal with the
emergent issues. For example, the FCC had to give away the spectrum to the minority owned businesses under more
liberal terms than what was originally bid for. In India, several states had no bidders at the end of the bidding process,
possibly due to the inappropriate design of the bidding units.
While theory is important in understanding the auction design elements and their inter-relationships, experience of
auction processes across countries shows that it is important to understand the prevailing context and find mechanisms
to embed it in the design. For example, in the UK, auction design took into account the government’s desire to have
fresh entrants in the 3G service provision.
While India was one of the early adopters of spectrum auctions, its success in service provision has been modest. This
paper critically examines the issues in auction design for the two phases of licensing namely in the fixed services and GSM
900 MHz (first phase) and cellular licensing in the 1800 MHz band (second phase). Further, it reviews the key elements in
the design process namely a coherent regulatory framework, choice of service areas, flexibility for service area
consolidation, standards and their role, convergence, managing public service regulation and managing defaults. The
paper compares the design and implementation of these elements in the United States (US), United Kingdom (UK) and
Australia with the objective of drawing lessons for policy makers involved in the design of auctions.
Keywords: Spectrum, auctions, cellular, India
JEL codes: K23, N55 and L96
Broad Band Policy Panel
Simon Jean-Paul, France Telecom, DER/DIRE and ETNo, Paltridge Sam, OECD, Jee, Kyoung-Young, ETRI, South
Korea, Robert Pepper, FCC, Washington DC, USA, Link Hoewing, Verzion, USA, Bernard Courtois, Bell Canada,
Eckert, EU Commisssion, Brussels
39
Interconnection and Acess (3 Sessions) - IA3
IA3.1 Peter Lewisch: Cerha, Hempel & Spiegelfeld, Vienna, Austria
Regulatory price determination in a liberalized mobile phone market?
There is an intense current discussion in regulatory economics when and how to end the regulatory transmission
period leading from a previously monopolized to a fully competitive market. Various proposals advocate a position
whereby ex-ante-regulation should be substituted by the rules of the general competition (cartel) law (”phasing out of
sector specific regulation”), as soon as significant market power is ended. The Austrian telecom regulatory authority
has, in a recent decision, deliberately taken a different position and has issued price determination decrees that fix
each single interconnection tariff of mobile phone operators, even though none of these operators enjoys significant
market power. Moreover, the regulatory authority has fixed the relevant interconnection prices at a different level for
each particular supplier according to the market share of the respective operator, thus establishing bureaucratically
determined price differences between competitive suppliers. This paper discusses the theoretical foundations of this
regulatory transition, the implications of the intense regulation by the Austrian telecom regulatory authority, the
European Commission’s recent concern regarding interconnection tariffs of mobile operators, and alternative
regulatory regimes. The paper finds no economic foundation for the prolonged bureaucratic price fixing in a
competitive market.
IA3.2 Mag. Natascha Freund, MAS Telekom Austria AG, Vienna, Austria
Dr. Ernst-Olav Ruhle, 3G Mobile Telecommunications GmbH, Vienna, Austria
Regulatory concepts for fixed-to-fixed and fixed-to-mobile interconnection rates in the European Union
The last years have shown a significant decrease in interconnection rates throughout the countries of the European
Union. This has mostly been brought about by regulatory measures and orders of the relevant authorities. Support has
come from the European Union with respect to the formulation of principles for the regulation of interconnection fees,
decisions about the design and contents of cost accounting systems and the publication of benchmarks. The regulatory
regime of the EU has recently been reviewed and a new regime has been adopted and is about to be transposed into
national legislation in the member states.
The aforementioned statements refer mostly to the interconnection rates for fixed networks, either origination, transit
or termination. Interconnection rates in mobile networks have also been regulated but the framework is often not as
clear and straightforward. Therefore, the current paper looks into the regulation of fixed-to-fixed in comparison to
fixed-to-mobile interconnection rates in more detail with a clear focus on termination services as the most important
service from a competitive point of view.
In section 1, a general but short introduction about the respective national regulation of interconnection fees is given,
taking into account the framework provided by the European Union and also the concepts of some of the EU Member
States. The necessary legal background is presented in a short way, with a special focus on Austria.
The results of the implementation of these concepts is shown in section 2, where the currently regulated fees in the EU
Member States for fixed-to-fixed interconnection are analyzed and similarities and differences in the approaches
between countries are pointed out. Thereby, the preconditions of regulatory measures in the area of interconnection
fees are described as well as the cost standard used for regulation of this issue. The results and the consequences of
theses concepts are shown on the example of special proceedings as well as the argumentation of NRAs.
Likewise, the regulation of fixed-to-mobile interconnection rates is analyzed in section 3. Reference is made to the
way fixed-to-mobile rates are regulated in comparison to fixed-to-fixed rates regarding legal foundation, the
importance of significant market power and the cost orientation of such rates. Thereby, we draw some conclusions
regarding the policies applied by different EU member states with respect to the regulation of mobile termination fees
compared to their policies in the fixed network interconnection regulation and analyze the principles guiding member
states for regulatory decision making in this area.
Section 4 comprises a comparison of the regulatory concepts standing behind the regulation of interconnect fees in
these two areas. Furthermore, it is looked at whether the results of this regulation has specific effects on competition
between fixed and mobile networks.
A summary is contained in section 5 combined with an outlook regarding future possible steps in the regulation of
fixed-to-fixed and fixed-to-mobile interconnection rates, e.g. brought about by the recently adopted new regulatory
framework in the EU and the decision of the EU not to continue with benchmarks and best practice recommendations
for fixed interconnection rates. Especially, the new framework for access and interconnection combined with the new
rules for determining and regulation significant market power will have a strong impact on the future definition of
markets and the determination of interconnection fees.
key words: Interconnection, Mobile Terminationrates, benchmarking, cost orientation, EU policy
40
IA3.3 Jeffrey H. Rohlfs, Strategic Policy Research, Inc., USA
Efficient Pricing with Cross-Elasticities, Network Externalities and a Budget Constraint: With Application to
Termination Charges of Mobile Telecommunications Operators
This paper develops the conditions for economically efficient pricing in the presence of cross elasticities, network
externalities and a budget constraint. In 1979, we addressed this problem in “Economically Efficient Bell System
Pricing.”7 Cross elasticities were dealt with by substituting “superelasticities” for direct elasticities in the usual
Ramsey formula. Network externalities were dealt with by weighting the price of access in the Ramsey formula by an
“externality factor,” representing the ratio of social value of network access to private value.
This approach implicitly assumes that the matrix of partial derivatives of demand is symmetrical. In the absence of
network externalities, symmetry is often a reasonable assumption, corresponding to the absence of Slutsky income
effects. Network externalities can, however, cause the matrix of partial derivatives of demand to be asymmetrical,
even in the absence of Slutsky income effects. Under these circumstances one must be careful to avoid counting the
externality twice—once through the cross-elastic effects and once through the externality factor.
The approach developed in this paper is explicitly to maximize the surplus integral. The integral is path-dependent,
but the appropriate path of integration is determined by economic logic; viz., to increase quantity of access first and
then increase quantities of usage. This path is the only one that reflects the full external benefits of every subscriber’s
being able to make calls to every other subscriber. The first-order conditions for economic efficiency can then be
defined for surplus calculated along this path.
This technique is applied to the optimization of termination charges of mobile telecommunications operators.
H2 Taxation, Subsidies, and Revenues
L5 Regulation and Industrial Policy
Keywords: Efficient Pricing, Network Externalities
IA3.4 Escribano, A and Zaballos A.G, Universidad Carlos III de Madrid, Spain
Optimum Capacity and Pricing Interconnection under a Capacity Constraint
The sector of telecommunications as it has been shown lately, is mainly characterised by the competition among the
different operators running in the market, either fixed or mobile. However, despite of this fierce competition that can
be observed, there are some issues that still remain important within this sector, we are referring to issues such as
pricing final services, entrance, segmentation in the market, interconnection, etc.
However, all this issues are strongly related to the operators’ network and the search for achieving a better efficiency
during the regulation period. The present article deals with a new methodology of computation of the interconnection
prices in Spain. It could be proved that a per minute model of setting prices is not as efficient as it was thought when
the internet traffic is considered. Therefore, this article tackles this problem, by defining a new methodology which
shows how the interconnection prices should varies depending on whether the operator hiring the net do adjust or do
not adjust to the estimated traffic that was expected. The model presented consider two scenario, the first one
concerning the local and short phone calls, whereas the second scenario deals with a long distance phone calls.
The model presented in the article is a capacity model, where the entrants instead of buying minutes of
interconnection, what they buy are just parcels of minutes according to the estimations done before. Therefore, the
prices of interconnection are pre-paid, and depending on their efficiency the per minute cost could be higher or lower,
i.e. the more minutes are in a point of interconnection, the lower would be the per minute cost as the efficiency of the
operator is higher, so that, with a model of capacity the sizing of the network concerns basically to the entrants, alike
of a per-minute model.
Jeffrey H. Rohlfs, “Economically Efficient Bell System Pricing,” AT&T submission to Congress, 1978. Bell Labs Economic Discussion Paper
#138, presented at the 7th Annual Telecommunications Policy Research Conference, Skytop, Pennsylvania, 1979.
7
41
IA3.5 Dan Maldoom: DotEcon Ltd, London, UK
Caller-Called Party Interaction: implications for call termination
Models of telecommunications demand generally assume that call externalities between caller and called party are
internalised. Often, this situation arises as a result of regular, repeated communication. In such repeated bilateral
calling relationships, calls in either direction may serve the purpose of communicating news. Therefore, the optimal
calling pattern in one direction may depend on the calls received in the opposite direction and vice-versa.
As a result of these interactions, traffic flows in one direction in a bilateral calling relationship may be affected not
just by call prices in that direction, but also by the price of calling in the opposite direction. Where the parties in a
bilateral relationship can internalise externalities, they may be more willing to plan regular calls to reduce the total
costs of calling regardless of direction, making traffic balance more sensitive to the relative costs of calling in each
direction.
This situation gives rise to a novel form of substitution, in which ingoing and outgoing calls within regular calling
relationships can behave like substitutes, even though they are purchased by distinct consumers.
Further, where this call direction substitution occurs, subscribers have an indirect interest in the cost of being called.
Raising call termination rates can lead to increased outbound calling in order to replace reduced inbound calls; this
may make some subscribers worse off. If there is competition ‘in utility space’, operators need to take this effect into
account when determining the optimal balance in charging for different services.
Keywords: telephony demand, substitution, call termination
JEL classification: D11, D49, C72, L19
IA3.6 Christian Koboldt & Roger Salsas, DotEcon Ltd, London, UK
Roaming Free? Roaming Network Selection and Inter-Operator Tariffs
*
International roaming – the ability to use one’s mobile phone on foreign networks – has contributed to the success of
GSM services in Europe, but has also been a constant concern for competition authorities. Whilst competition for
subscribers has driven down the cost of owning and using mobile phones, roaming charges have remained high, and
have been the subject of investigation for example by the European Commission.
However, in order to see whether high roaming charges are indeed the result of failing competition, and in order to
identify appropriate remedies, one needs to understand how technological constraints impacts on competition in the
provision of roaming services. In particular, the limited ability to direct roaming traffic onto a particular network,
combined with the need for multiple contracts in order to be able to offer continued coverage, implies that price
competition at the level of inter-operator tariffs (IOTs) is muted; rather, operators may have incentives to compete for
‘initial connections’ through coverage of hot spots.
In this paper, we model competition in the provision of wholesale roaming services, and its implications for retail
offers, depending on the ability to direct roaming traffic onto particular partner networks. Within these frameworks, it
is also possible to examine the impact of cross-border mergers that are often seen to improve an operator’s ability to
offer seamless roaming service across an increasing number of countries as a result of an enlarged footprint.
Keywords: international roaming, competition, internalisation
JEL classification: D43, L13, L42, L96
42
IA3.7 Jerónimo González, Manager European and International Regulation, Telefónica SA, Belgium
Proposed measures for an enabling regulatory framework aimed at establishing a balanced development of
Fixed Broadband Access Services
Massive deployment of Broadband access infrastructures together with the establishing of an enabling and convergent
communications policy environment have been recognised in many areas of the world as the key steps for achieving
the so-called Information Society. Consequently, it is apparent that policy-makers are currently paying a great deal of
attention to the issue as shown by the current debates, for example, in the USA and in Europe thus revealing the
importance attached to the issue.
Nevertheless, not all policy-makers involved seem to share the same views on how to achieve the targets and/or the
policy models better suited to deal with this. While a certain trend towards paying more attention to the fostering of
facilities based competition can be observed, it is still very hard to find a coherent path from the current, tight and
divergent regulatory models to the right combination of policy measures aimed at establishing a converged policy
framework that would encourage both deployment of broadband access as well as guarantee the success of the
Information Society.
This paper focuses on the regulatory aspects of the supply of fixed broadband access infrastructures and services. It
reviews the most notable experiences throughout the world (e.g. the USA, Canada, Korea) and the lessons learnt from
them. The successful story of mobile services, e.g. in Europe, provides some additional lessons to be taken into
account. The paper identifies analogies between the initial situations of mobile services around 1995-1996 and the
reasons for their success compared to the current objectives of broadband access deployment. Although the context of
both services have obvious differences, some conclusions can be drawn from that comparison, in particular, the
effects of a regulatory system that fosters both facilities and services competition.
The paper focuses on how to change to a system that is more focused on fostering facilities based competition as well
as on giving a different regulatory approach to voice and data (Internet Access) services. The paper also proposes
measures aimed at making a competitive and balanced xDSL environment compatible with:
i)
the existence of historical incumbencies such as ownership of the telephone network,
ii)
the need to encourage investments both in new and the existing infrastructures
iii)
the commitment of historic operators to have quick development of xDSL services in competition
with other platforms
iv)
the aim of fostering facilities based competition through the availability of alternative offers such as
cable, fibre, WLL, and other xDSL platforms based on the incumbent’s local loops, etc.
v)
the need to preserve the interest of consumers (digital bridging)
Keywords: broadband policy, unbundling, xDSL, bit stream access services, digital bridges
IA3.8 Heleen de Vlaam and Carleen F. Maitland, ICT Section, Faculty of Technology, Policy and Management,
Delft University of Technology, The Netherlands
The Increasing Importance of Access in 3rd Generation Mobile Markets
The European-wide transition to the 3rd generation mobile technology will complicate what were once wellestablished principles of the industry. Basic concepts such as ‘competitor,’ ‘network capacity’ and ‘access’ are
quickly becoming more difficult to define and to grapple with. For example, in an era of network sharing, which
includes both physical ‘sharing’ and ‘sharing through roaming,’ how does one define ‘access?’ More importantly,
how does a third party go about securing it?
In this paper we consider the issue of access in the context of the emerging European UMTS market. In particular we
concentrate on how the role of network access in shaping the industry structure will change from 2G to 3G networks,
focusing on mobile virtual network operators (MVNOs), roaming and network sharing. Examples are given from the
Netherlands and the UK. In the paper we argue that the coincidence of a range of factors, including policy decisions
driven by economic pressures, firm strategies, and continued rapid evolution in network technologies will magnify the
effect of network access in the industry. This change occurs in the context of a shift toward competition policy within
the European sector-specific Framework. It imposes a menu of very general principles to be implemented by national
regulators, which leaves many access-related issues open to national interpretation. Our aim is to identify areas of
uncertainty and variance in treatment of access issues and their implications for both policy.
43
Cost Allocation – A1
A1.1 Florentín González López, Gabriele. Kulenkampff, WIK Wissenschaftliches Institut für
Kommunikationsdienste GmbH, Bad Honnef Germany José Antonio Portilla, Klaus Hackbarth,
Communication Engineering Department University of Cantabria, Santander Spain
Cost and Network Models and their application in Telecom Regulation Issues
Telecommunication regulation is still an emerging field of interest for economics and engineers. WIK and the
Communication Engineering Department of the University of Cantabria (Spain) are developing bottom-up cost
models to give National Regulatory Authorities a valuable instrument to check cost data provided by the incumbent
and to set charges for specific services according to the forward-looking long run average incremental costs (FLLRAIC).
In most European countries the telecommunication markets are liberalised and alternative network providers are
competing with the historic incumbents. As it is economically unfeasible to reproduce the entire existing network of
the incumbent, the regulatory framework has to provide a settlement where Other Network Operators (ONO) can use
parts of the incumbents network at “fair” prices. The definition of this price is very important for the market
development and competition. To ensure competition, the cost standard for wholesale regulation has be one, which
reflects the costs in a competitive environment. This cost standard is based on forward looking long run average
incremental costs. Efficient service provision means that the incumbent would offer the same services with the most
appropriate technology.
Traditionally, the historic costs of the incumbent don’t reflect those cost which would have incurred under an efficient
service provision. Thus, for regulatory purposes it is inappropriate to base rate regulation on the historic costs of the
incumbent operator.
The aim of this paper is to discuss the characteristics and the applicability of bottom-up cost models for
telecommunications services. Telecommunications operators offers a broad range of services, like mobile and fixed
services. These services can also be subdivided into access and conveyance. We will analyse the definition of the
relevant increment against the background of specific services, like FRIACO (Flat-Rate Internet Call access
origination) or mobile call termination and the respective FL-LRAIC determination Our bottom-up approaches will be
contrasted with top-down approaches.
Bottom-up models build up the network structure to obtain the assets which would result from an efficient service
provision. Starting with actual demand and current best available technology a network is build up to estimate the FLLRAIC in providing a specific service. As bottom-up models simulate the production process of any network operator,
often only public available data is needed.
It will be outlined that the top-down methodology starts with the incumbent's actual asset portfolio which is needed to
provide a specific service. The assets are evaluated with historic costs or with current costs. Of course, we will discuss
the applicability of top-down approaches for regulatory purposes.
The paper” is structured as follows. First, we outline the necessity for cost oriented wholesale regulation. Then, we
define the cost concept of forward looking long run incremental cost and why this concept reflects best the cost
orientation required by the EU-Commission. The terms “long run” and “incremental” are deeply investigated as they
are essential to understand the cost concept. Then the different methodologies to calculate FL-LRAIC are presented.
We will show why a bottom-up methodology should be preferred rather than a top-down methodology. Furthermore,
we will show how bottom-up models are developed taken into account network optimisation techniques. We show
how the FL-LRAIC can be calculated for different services, like access, fixed interconnection or mobile
interconnection services. For this purpose we show the requirements from an engineering point of view, where
network models are traditionally divided into functional and partition models. Finally, some practical examples from
software programmes and their design will be shown.
JEL : L51, L96, M41
Keywords : FL-LRAIC, cost orientation, bottom-up models, top-down models
44
REFERENCE
Anonym, Flächendeckung und Kapazität, NTZ nº6 2001
Ayllón/Hackbarth/Jariego, A Computer tool for strategic planning of Transmission Networks, Proceedings of the 2º
ORSA Telecommunication Conference, Miami Florida 1992
Fuss M., Richtfunksysteme in UMTS Netzen , NTZ nº 3 2001
Garcia,Hackbarth, Mathematische Planungsmodell für die langfristige kostenoptimale Gestaltung von Fernmeldenetzen,
NTZ nº 30 1977
García/Hackbarth/Portilla, Method and Solutions for Network Planning, Proc. of the IST Mobile Communication
Summit, Dublin, Ireland, 2000
Hackbarth K., Kostenuntersuchungen im B-ISDN, Der Fernmeldeingenieur Bd. 43 1989
Hackbarth/Muñoz/Neu, A method and a procedure for tariff calculation of permanently switched digital connections,
Proc. of the Int. Telecommunication Systems Conference, Nashville USA 1993
Hata, M., Empirical Formula for Propagation Loss in Land Mobile Radio Services, IEEE Trans on Veh Tech, Vol
VT-29, Nº 3, Aug 1980, pp 317-325
Holma/Toskala, WCDM for UMTS, Wiley&Sons 2001
Schmidt/Hackbarth, Ein analytisches Kostenmodell für das nationale Verbindungsnetz, Regulierungsbehörde für
Telekommunikation und Post 1999
Portilla/Hackbarth, TAROCA, a tool to calculate interconnection tariff based on a bottom up method, IEEE European
Conference on Universal Multi service Networks, Colmar, France 2000
Rabanos, GSM Mobile Communication, Airtel Fundation 1999
Rabanos / H., Lluch, 3ºG Mobile Communications, Telefónica de España, 2000.
Rappaport / Hong , Traffic Model and Performance Analysis for Cellular Mobile Radio Telephone Systems with
Prioritized and Nonprioritiezed Handoff Procedures, IEEE Transactions on Vehicular Technology, Vol VT –35, Nº 3
August 1983
Ward K., Network life cycles, Porc. Of the centennial scientific days of PKI, Budapest 1991
Wöhrl/Hackbarth, Techniques for analysing traffic to measure the LRIC of interconnection services,, Vision in
Business DG13 on Bottom Up study results, Brussels
A1.2 Fernando Beltrán, Associate Professor, César García, Instructor, Center for Studies on Management of
Network Services, CGSR, Department of Industrial Engineering, Universidad de Los Andes, Bogotá, Colombia
Diana Sarria, Business Solution Engineer, Equant, Bogotá, Colombia
The Colombian Network Access Point: Insights on Cost Allocation and Interconnection Agreements
Colombian ISPs have sought for ways to optimize their use of international bandwidth (purchased from US Internet
backbone) by agreeing to establish an exchange point for Internet traffic, therefore avoiding the use of international
channels when routing local traffic. The operation of the so-called NAP (Network Access Point) Colombia, set up in
1998, brought on another kind of issues: those regarding the allocation criteria of the NAP’s monthly operation cost
among the participating ISPs.
The major concerns regarding the operation of the NAP Colombia may be summarized as i) the cost allocation
criterion to be used for allocating recurrent expenses, ii) the policy issues for admitting new members into the
agreement and, iii) tariff schemes for new services: bilateral agreements and transit.
In our work we propose to adapt the the Henriet and Moulin (1996) cost allocation method in order to efficiently
allocate the monthly cost operation among the NAP members. Other cost methods like the proportional method and
the private cost method – which assigns to any participant the NAP’s monthly operational cost divided by the number
of participants – provide incentives for undesired behaviors by the ISPs. The Henriet and Moulin’ s cost allocation
method fulfills certain axiomatic properties like additivity, sustainability and no transit.
Henriet and Moulin show that their method (the external cost method) satisfies three main axioms, namely, additivity,
sustainability and no transit. According to the additivity axiom, the external method is additive with respect to costs;
the sustainability axiom makes it unprofitable for any coalition of users to duplicate the network for its internal traffic.
The no transit axiom makes it unprofitable for two users i and j to route their traffic through a third node k.
The application of the external method is analyzed under the light of the additional issues presented above: the cost
allocation problem when new members are accepted, and the presence of bilateral agreements and transit services.
Keywords (JEL code): Telecommunications (L96), Information and Internet Services (L86)
Key References
Bailey, J (1997) “The Economics of Internet Interconnection Agreements”. In “Internet Economics” ed. by Lee W.
McKnight and Joseph Bailey, MIT Press.
Henriet, D., y H. Moulin (1996). “Traffic Based Cost Allocation in a Network”. Rand Journal of Economics.
Huston, G. (1999) ISP Survival Guide. John Wiley and Sons.
Laffont, J.J.; S. Marcus, P. Rey and J. Tirole. (2001) Internet Peering, AER Vol.91 No. 2, May.
45
A1.3 Cabrera, J, Director del Dpto. de Análisis Económico (CMT), Spain
Zaballos, A.G., Técnico de la Comisión del Mercado de las Telecomunicaciones
Computation of the Net Cost of Universal Service: From reality to the future
The telecommunication services that have to be provided all over the country, wherever those services are demanded
in an environment of equality, affordability and certain quality level, conform the so–called Universal Service.
The National Regulatory Authority (NRA) in Spain (Comisión del Mercado de las Telecomunicaciones) is nowadays
working with the Incumbent Costs Accountancy, to get an objective estimation of those Universal Service Cost. In
this way, the last January 31st it was eventually defined the concept of “non profitable area” as well as a methodology
of estimation of the Net Cost of Universal Service. The first part of the present article deals with the main
characteristics of this methodology highlighting the steps that were followed to estimate the final Universal Service
Net Cost.
Nowadays, the Telecommunication Sector is mainly characterised by an active competition and a progressive
introduction of new technologies, that allow a world-wide communication between the companies and the consumers.
Moreover, with the developing and spread of Internet which allows the transmission of data and image, new business
opportunities come up among different companies in different countries and with different consumers all over the
world. However, this popularisation is not possible unless certain broadband services be part of the Universal Service.
The present article proposes an alternative methodology to compute and estimate the Net Cost of Universal Service
when it is introduced broadband services as a part of Universal Service, and it is also concerned with the forthcoming
Universal Service Fund, and the effects it may has on the competition within the sector (either fixed or mobile).
New Directives published by the European Union and the effects they may have over the estimation of this cost and
the Fund of Universal Service Obligation in the European Members, It is also analysed.
Keywords: Universal Service, Subsidy, Cost allocation.
JEL Classification: L5, L1, H71, L96
A1.4 J. Confraria, A. Amante, R. Vala, ANACOM – Autoridade Nacional de Comunicações
On the Implementation of Price Oriented Costs
The principle of cost orientated prices is one of the essential components of the regulatory framework set by the Open
Network Provision (ONP) Telecom Directives. The objective of is to provide regulatory agencies with a legal basis to
deal with excessive prices resulting from monopoly power. Thus the price charged by the provisioning of a certain
service should reflect the underlying costs incurred in providing that service, allowing efficient entries in market and
encouraging the rapid development of an open and competitive market.
This paper deals with some theoretical and empirical issues face by regulatory agencies in the implementation of cost
oriented prices. The main topics are as following:
1.
2.
3.
4.
Whenever there are economies of scale the relevant cost of a service depends on the estimated demand for
that service and on its price. Economies of scope may well imply that the relevant cost for a given service is a
function of demand and price of other products, not necessarily related on the demand side, but related at the
level of the cost function. This problem is most relevant whenever demand is not stable. It implies that a
choice must be made between different estimates of demand, e.g. between the regulator and the operator
demand forecasts.
Regulatory analysis of current prices may well have to deal with the distinction between short run and long
run costs, beyond the more usual discussion of the choice between different forms of long run costs or
between long run costs and average costs. Additional uncertainties are likely to follow as it is argued that the
short run cost function depends on demand levels and on demand growth. Long run/short run and
pessimist/optimist demand scenarios lead to completely different costs.
The use of benchmarking is discussed and it is argued that the assumption that international benchmarks are
a proxy for the appropriate long run costs has serious shortcomings.
In regulatory practice, these problems increase the potential of legal challenges of regulatory decisions, made
by regulated firms, increasing uncertainty.
Keywords: Cost orientation; Natural monopoly; Telecommunications; Regulation; Cost Functions; Economies of
Scale
JEL Classification: L51; L96; D42
46
A1.5 Justus Haucap & Jörn Kruse, Institute for Economic Policy, University of the Federal Armed Forces Hamburg,
Hamburg, Germany
Predatory Pricing on Liberalised Telecommunications Markets
Predation can be part of a rational, profit maximizing business strategy, as game theoretic models show, if there are
either information asymmetries on the horizontal level between incumbents and entrants or in the vertical relationship
between firms and investors/banks. However, prices below average cost and even below marginal cost can also be
part of a profit maximizing business strategy without any predatory intent. As a result, it is often difficult to
differentiate between predatory, anti-competitive price cuts and normal, competitive pricing policies. The question
then is, what regulatory policy should best be adopted to deal with predation.
As we argue in this paper, the current reguatory policy which requires incumbents to obtain regulatory authorisation
for all price cuts, e.g. for national and international toll calls in Germany, is not adequate. Similarly, price squeeze
tests have their limitations. Instead we argue for a ratchet rule as suggested by Baumol (1979), augmented by an
efficiency defense in case the incumbent only wants to cut prices temporarily. However, the burden of proof for the
efficiency defense for temporary price cuts should be shifted to the incumbent.
This ratchet rule is attractive since the risk of predatory behaviour is low on telekommunications markets, mainly
because the price for essential inputs is price regulated. The experience of the German telecommunications market
supports this conclusion.
JEL: K21, L41, L43, L96
Keywords: Predatory Pricing, Retail Price Regulation, Liberalisation
UMTS – U1
U1.1 Neil Gandal, Tel Aviv University, David Salant, NERA Economic Consulting, Leonard Waverman London
Business School and NERA Economic Consulting, USA
Preliminary and Incomplete: Please Do not Cite of Circulate
Standardization versus Coverage in Wireless Telephone Networks
Since 1994, Europe and North America have taken divergent approaches to managing spectrum for wireless for voice
and data services, the so-called 2G and 3G bands. The European Community has mandated a harmonized standard,
GSM, in the 2G bands, and is in the process of adopting the same approach to Wideband CDMA (WCDMA) in the
3G bands. In contrast, the North American approach has been to allow the market to decide, that is, operators have
been free to choose among the recognized four digital wireless standards: CDMA/IS-95, GSM, TDMA and iDEN.
The issue of market-based versus mandated standards has been addressed in many other settings. In most settings in
which network effects are present, compatibility across platforms has been a key determinant of the success or failure
of a particular technology. In the case of wireless telecommunications, however, interconnection and the availability
of the relevant infrastructure can be a substitute for compatibility. An individual subscribing to any one of the five
wireless technologies (analog, AMPS, CDMA, GSM, TDMA and iDEN) can easily make calls to and receive calls
from someone else subscribing to any one of the other standards (or to and from the wire-line POTS network) as long
as there is (i) interconnection between networks and (ii) the relevant infrastructure is in place. In the U.S. (and several
other developed countries, interconnection has been achieved by standard interconnection protocols. Coverage in
different geographical areas has been achieved either by providing nationwide service (Sprint) or by roaming
agreements between firms using use the same technology, but serving different regions. (PacBell Wireless and
Voicestream have such an agreement for their GSM subscribers.)
In this paper, we examine the tradeoff between mandated standards and interconnection. We first provide institutional
background; we then empirically examine whether, other things being equal, penetration rates were lower (or higher)
for countries with multiple incompatible digital standards. We finally discuss the implications of our results for the
current debate about 3G standards, in which CDMA2000, which is backed mainly by US firms, competes WCDMA,
which is backed by the European Community.
47
U1.2 Daniel Collico Savio, Telefonica de Argentina, ARG
Usability aspects in 3G/4G mobile telephony
After several months of delay, NTT DoCoMO finally launched in Oct 2001 the world’s first 3G mobile-phone
commercial service in Japan. One week after its launch, this service has seen some glitches, but NTT DoCoMo is
confident that its lead in wireless technology is secure.
It was said that there were no major mishaps and that any glitches had little to do with the core 3G technology.
Elsewhere –mainly in the european arena- third generation mobile still means troubles8.
However, in the last two years, more cell phones were sold than computers, televisions, PDAs and pagers combined.
It has even been predicted that by 2004 more people will connect to the Web via cell phone than by computer.9 This
means a huge market and the challenge of offering to subscribers exciting new features, such as video clips and high
speed Internet access.
In the financial market, over the last year the mobile telecommunications industry has undergone a complete change;
the initial euphoria surrounding the promises of German and UK licensing process, has been replaced by pessimism.
This new feeling was driven by the large debts that companies have incurred to enter the market, and doubts regarding
the expected new range of services originated by the 3G landing.
There are certain reasons for this changes in the markets.
First of all, a major fact that should be taken into consideration is the enormous financial investment that 3G
represents. In the bidding over the past two years, Europe’s telecom groups spent about $100 billion on 3G mobile
telephony services.
Secondly, the viability of 3G services is still being discussed. As part of the bidding process for the licences, all the
operators discussed the range and nature of these services, which in theory will be available over a variety of devices
(PDAs, mobile phones, etc). At present, however, the exact nature of the services to be offered over 3G networks
remains open to speculation. Future 3G services rely on batteries perfomance. There is some concern in the media 10
that energy demands of next-generation phones on batteries will increase by a hundredfold. Even Texas Instruments
and Intel are worried about whether batteries will be able to handle the power demands of the devices they are
helping to develop. As a consequence, no operator has yet begun to offer services with the limited exception of NTT
DoCoMo (Japan) and Manx Telecom (Isle of Man). On several occasions, companies have announced their intention
to begin trials, only subsequently to delay them.
Finally, in the middle of this struggle remains a simple fact: customers may not like or need some 3G services. They
have widely adopted before the email as the new communication standard. ICQ or AOL Messenger are logical steps
supporting this idea, in the Internet field. Whenever these users would turn to the mobile world, they will prefer a
simple routine to exchange text mesagges, and certainly not a complex menu navigation bar.
The success of the primitive but popular text messaging, brings up the question: is “texting” the bridge to the future,
or just another alternative? Thus, text messaging could be considered as a simpler alternative, in the middle of the
DoCoMo launch (2.5 G) and the non-fulfilled promises of 3G communication. Some developments of 4G (specially
BlueTooth and Wi-Fi) are certainly happening now (like MP3 listening, LapTop wireless surfing in caffes and Alaska
Airlines check in) and many others are expected to be possible in the future (locate each other, interact with cars,
positioning applications, handset payments, etc.) A glimpse of this possible future can be found in several equipment
companies web sites11.
All over the industry there are clear signs that the telecoms speculative boom has ended. However, simpler and
cheaper products and services in mobile telephony will still be needed. We are facing a new era with less players in
the mobile arena (roughly four in US, three in Japan and about five in Europe). The winners of this battle between old
2G and new 3G telephony will emerge as a consequence of several factors; in this paper the importance of usability
as a key factor within this struggle will be enhanced.
Keywords: Mobile Internet, 3G, usability, email, ICQ, SMS
8
“An analysis or recent structural and strategic issues in telecommunications”, Peter Curwen, Info October 2001.
Time Digital, January/February 2001
10
http://www.mbizcentral.com/magazine/story/archive/february-2001/3g-energy-crisis
11
http://www.semiconductors.philips.com/3g/index_flash.html?mp3
9
48
U1.3 Pierre Vialle, MARKETIC research group, Business Administration Department, Institut National des
Télécommunications
Mobile Internet Strategies of the French Operators for Business Customers
The three French mobile telecommunications companies have launched their business mobile internet portals in the
year 2000 and 2001, in order to respond to the specific needs of business customers. In this paper, we first present
business mobile internet, demand and its market perspective in France. Then, we analyse the strategies of the different
operators, in terms of service, price, distribution and partnership policy, as well as targeted market segment. Finally,
we relate the observed strategic positioning to the general strategy of these three companies.
References :
Vialle Pierre (sous la dir. De) (2002), “L’Internet mobile pour les entreprises : le positionnement des opérateurs
mobiles français,” Document interne de recherche, MARKETIC.
Vialle Pierre, Olivier Epinette (2001), « The attitudes and perceptions of ICT managers of large firms towards Mbusiness Internet adoption : beyond the magic…, » Conference on Telecommunications and Informations Markets
(COTIM), Karlsruhe, Germany, July 18-20th 2001.
JEL code : M31, L96
keywords : Marketing, BtoB, telecommunications, mobile, mobile internet, strategy, pricing, portal
U1.4 Héctor Pérez Saiz, Juan Miguel de Sande Caldera: Telvium, Luis Castejón Martín: Universidad Politécnica de
Madrid, Spain
MVNO Regulation: Weak or strong? Lessons from Experience
The MVNO business model is a great opportunity for the different market agents:

For the regulators and users, MVNOs might increase the number of operators of the mobile communications
market, facilitating price cuts and the innovation of services.

For the entrants operators coming from fixed telephony market or mass markets, MVNOs are very interesting
way for entering in a market which was until that moment closed for them.

For the entrant operators with 3G licenses, MVNOs are an opportunity to create early a base of clients using
negotiations with GSM operators until 3G technologies is commercially available.

For the incumbents, MVNOs are in principle a threat for them, but current regulation is rather weak for them.
However, MVNOs might provide a great value to the MNOs specially when agreements are established on a
win-to-win basis. Also, MVNOs are an easy way for the incumbents to enter in foreign countries.

For the European Commission, a MVNO is an easy way for establishing a single European mobile
communications market, breaking down the entry barriers for the development of pan-European operators
which can compete internationally in the emergent mobile Internet market.
Due to all these reasons, with the current uncertainty in the emergent data mobile markets and the high investment
required for the development, it is required to consider carefully what is the role of the regulation and evaluate how
can impact the new regulations on the development of these infrastructures 3G. On the contrary, the relative maturity
of the 2G market requires a differentiated regulatory approach, playing an strategic role in this context the regulation
of 2,5G services as a transitional model from traditional voice services to advanced data services.
Key Words: virtual, investment, 2.5G, 3G, regulation, incumbent, Internet
JEL Code:L96, L51, O33, M20
Selected bibliography
Ekstedt, T. & Huber, M. (2001). Non Telecom. MVNOs. Motives & Business Set-Ups. MSc Thesis. August 2001.
Chalmers University of Technology.
European Comission, 2002. Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on
access to, and interconnection of, electronic communications networks and associated facilities (Access Directive).
www.europa.eu.int
Gretel, 2002. Nuevo Diseño Europeo de las Telecomunicaciones, el Audiovisual e Internet. Colegio Oficial de
Ingenieros de Telecomunicación. 2002.
Landgrebe, J. (2002). The mobile telecommunications market in Germany and Europe: Analysis of the regulatory
environment. Mobile Termination Charges and access for Mobile Virtual Network Operators.
http://groups.haas.berkeley.edu/fcsuit/Pdf-papers/Regulation-Landgrebe.pdf
OFTEL (1999). Mobile Virtual Network Operators: Oftel inquiry into what MVNOs
could offer consumers. A consultative document issued by the Director General of Telecommunications. June 1999.
www.oftel.gov.uk
49
New Services - NS
NS1 Sabrina Cioffi, Isabella Maria Palombini, Bartolomeo Sapio: Fondazione Ugo Bordoni, Rome, Italy
From Fixed-Phone to Mobile Data through Internet: New Business Models
After the numerous and important transformations of the last decade, the telecommunications sector is now
profoundly modified. The fundamental economic dynamics characterizing its development have dealt with: the new
order of the sector with the passage from monopoly to competition, the deployment of mobile networks, the
development of the Internet. These factors necessarily led to a revision of the traditional economic models of the
operators, centred around the telephone service, and the birth of new business models, more suitable to the new
scenario.
With the liberalization of the market and the establishment of National Regulation Authorities, the ‘90s marked the
final transition of the sector to a competitive environment, characterized by a number of new private operators who
began to offer services in wider areas after starting from local settings or particular market niches. Due to the presence
of new and diverse categories of actors, the range of supplied service has broadened and the price of telephone
communications has shrinked, with a consequent increase of users’ demand. Thus, the increased number of carriers
has faced an enlarged market. Besides, the revenues derived from interconnection represent until now an income
source compensating, for the former monopolist incumbent, the reduction of traffic revenues after the advent of
competition. This is particularly true for the long-distance market. In the local market there is still a substantial
situation of dominance of a single carrier, and only the deployment of new networks will give a powerful thrust to
competition.
Another significant phenomenon of this decade was the advent of mobile communications, the development of which
has been sustained at first by the fixed network. In a second period the mobile network itself has represented a source
of revenues for the fixed network, also compensating the reduction of redditivity due to substitution effects deriving
from the usage of mobile services.
In the market of Internet access the most relevant phenomenon has been the introduction of the “free Internet” model,
originating its expansion process. In this evolutive phase the fixed network has once again pushed the development of
the Internet, and the latter has in turn augmented the revenues from telephone traffic: the new telephone operators,
using the interconnection, have taken away from the incumbent a portion of the revenues for Internet access, but the
diffusion of Internet usage through dial-up still represnts a good source of revenues for the entire telecommunications
sector, given the existing (though limited) margin for operators and providers. Given the progressive reduction of
margins from this access, the free model is probably condemned to be put aside in a near future.
The advent of the Internet has modified the value chain of traditional telephone services: new economic subjects
(Internet service providers, content providers, dot.com companies…) have acquired a role next to traditional telephone
carriers. New user categories and new services have been defined. Finally, the originally vertical market has evolved
towards a more horizontal characterization.
The disruptive effects provoked by the Internet could be partially compensated with the advent of third generation
mobile services. Some of the above mentioned effects had already shown in the world of the first and second
generation mobile telephony, yet mobile telephony remained confined to telephony operators.
With mobile data, represented by GPRS at first and later by UMTS, the risk could show up again of horizontal
openings of the telecommunications market due to the sinergy with the information market. Anyway, mobile
operators, grown up with the experience of GSM, are already looking for a way of positively steering this process:
mobile networks could be the territory of challenge and the example model for the recomposition of the two worlds
and the realization of convergence.
With the new configuration of the sector, the conditions underneath investment policies have changed: they used to be
a part of objectives and policy making of the public actor and the telephone revenues represented the main financing
source for the development of new networks. Then the issue came out of how the market could guarantee the
necessary resources.
Finally, the centrality of the model based upon telephony can no longer be endorsed, neither at the technological level,
where the pervasiveness of IP is now undeniable, nor at the economic level, where Internet is a true revolution.
Anyway, whereas the asset represented by existing infrastructures must not be dispersed, the challenge for all
stakeholders is to understand limits and opportunities supplied by possible structural convergences, and to define the
new economic models framing them into the prospective vision of the entire complex reality of ICTs.
This paper deals with the above mentioned issues, with the aim to define and comprehend possible courses of such
economic models.
Keywords: business models, fixed and mobile networks, Internet evolution, telecommunications market
50
NS2 Ulrike Eberhard, Senior Consultant Strategic Marketing, DETECON Consulting GmbH, Bonn, Germany
Intelligent Transport Systems and Telematic Services
The linking of Intelligent Transport Systems (ITS) and telematic services based on innovative mobile
telecommunications technologies (GSM, GPRS, 3G, GPS, mobile Internet) leads up to flourishing markets especially
in regions with high traffic densities accompanied with congestion and security issues.
ITS are electronic based systems used to manage road network challenges such as congestion, security, dynamic
traffic control, speed regulation, rerouting, usage based toll collection etc..
Telematic services are telecommunication based services used inside vehicles for navigation, information, security
and entertainment.
This presentation will demonstrate that sustainable success in both markets asks key players to set up solutions and
business models that integrate and balance the needs of different public (e.g. national or local government) and private
(e.g. mobile operators, providers, equipment suppliers, end users) interest groups.
Accordingly it will deal with public transport policies, that is to say governmental needs and measures concerning
road transportation on the one hand. The investigation of potential end user´s needs for telematic services (e.g.
location, navigation, communication, fleet management etc.) and requirements for road network usage will outline the
critical success factors for integrative solutions on the other hand. Such solutions will be discussed using different
case studies throughout the world.
Content
1. Markets and their interdependencies concentrating on:
 Needs of customers of ITS and telematic services (owners of road networks, logistic industry, truck
drivers, drivers of private vehicles)
 Objectives of suppliers of ITS and telematic services (ITS industry, automobile industry, smart card
suppliers, operators of road networks, mobile operators, GPS/Galileo, suppliers of in-car equipment,
suppliers of mobile handsets, suppliers of billing and clearing services, content suppliers, navigation
software suppliers etc.)
 Technologies (GSM, GPRS, GPS, Galileo, audio video processing, electronic toll collection
systems)
 Regulatory and legal issues
2. Value chain and value networks

Classification of suppliers

Classification of solutions

Role of suppliers within different solutions
3. Evaluation and comparison of different case studies throughout
(1) Europe
(2) America
(3) Asia
4. Outlook
Topicality of subject:
Just the actual discussion within the German Bundesrat concerning the introduction of an electronic toll system for
usage based (driven km and number of axes) toll collection to be applied to trucks underlines the topicality of the
subject. Furthermore it is not excluded that this system will be introduced to private vehicles using the highways in
some years from now.
The manual toll collection system is well known throughout Europe´s highways. Discussions within the individual
countries as well as on the EU-level are ongoing to switch to electronic toll collection for example to save costs for
toll plazas.
Relation to the subject of conference:
The interlocking of ITS and telematic industry leads up to structural changes in the telecommunications industry. New
business models ask for
(1) forward integration of the value chain e.g. from network connectivity to content (=vertical),
(2) an improved cooperation between different telecommunication suppliers (=horizontal) and
(3) an improved partnering between different industries such as e.g. automobile and telecommunication
(=diagonal).
The presentations international reference is easily be deduced from the fact that neither business nor private traffic
does stop at frontiers. The already started process (in the EU) for standardization of parts of electronic toll collection
systems takes this into consideration too.
JEL Code: L96 L11
Key words: Transportation Policy , Telematics, Mobile Services
51
NS3 Fernando Gallardo Olmedo, Universidad Autónoma de Madrid, Spain
XDSL Services: an Strategic Approach
Telecom operators in a great number of countries are implementing strategies based on XDSL technology, specially
on ADSL. Both incumbents and new entrants are considering XDSL as an strategic choice in getting access and
offering new and enhanced services to its customers.
This paper intends to study XDSL platform from an strategic point of view. Three issues will be analysed:
1. Analysis of the strategic policies implemented by telecom operators through XDSL technology. The paper
will analyse (i) if XDSL is an appropriate tool to offer enhanced services through the unbundled local loop,
(ii) the possibilities that offer to incumbents and (iii) the general strategies available to telecom operators:
both in the wholesale markets and as retailer.
2. Competitive and regulatory problems that arise when incumbent enter into the XDSL market discriminating
in favour of its own subsidiaries and against new entrants
3. Assessment of XDSL investment. Real Options Theory will be apply. The investments could be profitable
not only because of its NPV, but for the real options that can be identified. Real options to be analysed are:
the option to defer investment in fibre optic or other advanced technology, the growth option and the
flexibility option. Besides identification, the paper will propose a methodology to assess them.
4. Is XDSL a good solution to disseminate broadband services among individuals and SME? This subject will
be studied within the EU policy.
52
Mobile Internet - MI
MI1 Petros Kavassalis, ICS-FORTH, Greece, Michael Batikas, Antony Chazapis, Foula Farmakidi, Zacharias
Kounoupas, Vassilis Kourakis, Marina Markantoni, Univ. of Crete/Dpt of Economics, Greece
The Dark Age of the Mobile Internet
The paper deals with the emergence of Mobile Internet in three global markets: Europe, Japan and the USA. We
analyze the current situation in the field, focusing on the relationships between the key players in the industry and
their position in the market value chain. We comment on the technologies supporting the development of the industry
and the services provided in these three different contexts. To explain differences in service offerings, business
models and adoption patterns from users, we take into account the cultural and institutional differences of each region
with reference to “National Trajectories of Change” theories12.
Innovative as a technology, Mobile Internet brought significant changes in the telecommunications industry. In its
early steps in the market, it was followed by great excitement. Nowadays, it is clear that only NTT DoCoMo in Japan
has managed to adopt a well-defined and successful business model, by using proprietary i-mode platform as the basis
to deploy an AOL-like strategy for customers recruiting. In Europe the mobile operators have not convinced their
clients about the usefulness of the first-generation WAP services. In USA, the “decentralized networks” institutional
model has resulted to a large market segmentation and absence of a clear Mobile Internet standard.
In order to understand in depth the business models employed in these three different institutional contexts, we make
reference to Dominant Design13 theories while focusing on the complementary assets, developed by Mobile Operators
in successful Mobile Internet market operations. We also provide a number of case studies about i-mode, SMS and
WAP offerings, that help us define in a more efficient way the structure of the Mobile Internet services supply and
demand conditions.
Next, we turn into the future to assess markets for emerging mobile technologies. We certainly expect major changes
in the field, mainly because of the upcoming 3G technology, along with the new applications it will bring. Mobile
operators face major economical and technological challenges, which could defy their status in the Mobile Internet
value chain. They have spent huge amounts, and therefore have huge debts, for the 3G spectrum licenses, while on the
other hand, new companies are eager to enter the field and grab their share of the pie. Also, in the technology
forefront, the development and adoption of new wireless technologies, such as WLANs, could introduce alternative
ways of mainstream mobile connectivity. Furthermore, the production and availability of new “next generation”
mobile devices that use the Mobile Network as simple access network to connect directly to the Internet, may consent
to users the possibility to bypass the operators’ installed base of service offerings. We map the emerging business
landscape according to the Value Net theory14 to highlight the critical role that complementarities among industry
participants and various forms of alliances can play in influencing business success or failure.
The paper is composed of four major sections. In Section 1, we provide a definition of the term “Mobile Internet”, dig
our study into the details of technologies supporting Mobile Internet services and explain what makes it different from
the “traditional” Internet. In Section 2, we analyse the current status of Mobile Internet service offerings and business
models. We flight over three global regions (Europe, Japan, USA). We explain the interaction between technology
innovation and business strategies within the process of the emergence of a dominant design and describe adopted
business models and how they, in turn, defined the position of each company in the market’s value chain.In Section 3,
we take a look on the future of Mobile Internet. We develop a dynamic industry analysis to foresee how the current
status of the market can be challenged by emerging technologies and how these technologies will affect the
boundaries drawn by each key player and, in turn, their corresponding relationships. What the new situation will be
like and how current market holders can adapt and become part of this new equilibrium?
JEL Classification: L1, O3
Keywords: Mobile Internet, disruptive technologies and firm competencies, strategic management, business models,
industry analysis
12
C. Freeman, 1987, Technology Policy and Economic Performance: Lessons from Japan, Frances Pinter; B. Lundvall, 1988, Innovation as an
interactive process: from user-producer interaction to the national system of innovation, in G. Dosi et al, Technical Change and Economic Theory,
Frances Pinter; R. Nelson, 1988, Institutions supporting technical change in the United States, in G. Dosi et al, Technical Change and Economic
Theory, Frances Pinter.
13
J. Utterback, 1994, Mastering the Dynamics of Innovation, Harvard Business School Press.
14
A. Brandenburger and B. Nalebuff, 1996, Co-opetition, Currency Douibleday.
53
MI2 William Lehr, MIT & Columbia , Lee McKnight, Tufts, USA
Wireless Internet Access: 3G vs. WiFi
This paper compares and contrasts two technologies for delivering broadband wireless Internet access services: "3G"
vs. "WiFi". The former, 3G, refers to the collection of third generation cellular technologies that are designed to allow
mobile cellular operators to offer integrated data and voice services over cellular networks. The latter, WiFi, refers to
the 802.11b wireless Ethernet standard that was designed to support wireless LANs. Although the two technologies
reflect fundamentally different service, industry, and architectural design goals, origins, and philosophies, each has
recently attracted a lot of attention as candidates for the dominant platform for providing broadband wireless access to
the Internet. It remains an open question as to the extent to which these two technologies are in competition or,
perhaps, may be complementary. If they are viewed as in competition, then the triumph of one at the expense of the
other would be likely to have profound implications for the evolution of the wireless Internet and service provider
industry structure. The goal of the qualitative discussion of these two technologies is to provide a more concrete
understanding of the differing worldviews encompassed by these technologies and their relative strengths and
weaknesses in light of the forces shaping the evolution of wireless Internet services.
MI3 William Lehr, Fuencisla Merino, Sharon Eisner Gillett: MIT Research Program on Internet and Telecoms
Convergence
Software Radio: Implications for Wireless Services, Industry Structure, and Public Policy
Software radio is one of the more important emerging technologies for the future of wireless communication services.
By moving radio functionality into software that has previously been implemented in hardware, software radio
promises to change the economics of deploying and operating wireless network services. This paper provides an
overview of the current status of software radio technology and then examines the implications of wider use of the
technology on the wireless value chain. Among software radios likely implications are an increased ability to tolerate
and support interoperability across heterogeneous air interface technologies (e.g., different standards for 3G, across
3G and WiFi networks, etc.); support for faster and more flexible network upgrades; the substitution of general
purpose hardware for dedicated hardware that has heretofore been the basis for radio designs; and support for
improved congestion management solutions. These implications suggest that software radio may be simultaneously an
integrative and disruptive technology. In the short-term, incumbent wireless service providers will benefit from the
lower production and deployment costs promised by software radio, while longer term, software radio creates the
potential for new open interfaces that could be leveraged by new entrants to change the structure of the wireless
services value chain. Software radio is a critical enabling technology with important implications for spectrum
management. Software radio increases the feasibility of moving towards more flexible spectrum usage models that
expand the range of options for implementing secondary markets for spectrum. The ability to modify the user's air
interface in real-time to take advantage of a greater range of frequencies or multiple air interface
protocols/technologies provides opportunities to improve interference management but also raises important policy
challenges for radio certification and enforcement. These and other important implications for industry and public
policy are explored in the paper, which draws on recent thesis work prepared by one of the co-authors.
54
MI4 Petros Kavassalis, Antonis Hatzistamatiou: ICS-FORTH, Greece, Ntina Spyropoulou, Manos Giakoumidakis,
Xenia Karampatsaki, Vaggelis Mitrokostas, Mariella Papadaki: Univ. of Crete/Dpt of Economics, Greece
Mobile Permission Marketing – Framing the Inquiry
The overwhelming acceptance of Short Message Service (SMS) among GSM subscribers in Europe, the intriguing
success of i-mode in Japan and, notably, the ongoing implementation of new mobile network technologies (GPRS and
UMTS architectures) boost the transformation of the mobile network from a voice-only network to an integrated
network infrastructure offering voice and data services. Today, wireless data services are still in an embryonic stage
of development with mobile messaging emerging as the “killer application”. Industry observers predict that growth of
wireless services will be powered by the amount of useful, fun content 15. In fact, "mobile" has special value in being
able to offer personalized content and target very specific vertical markets. With Mobile Internet, a user can send and
receive multimedia person-to-person messages, get a full colour picture, receive a news clip or video mail, and this is
irrespective of his physical position (in sharp contrast with the fixed Internet services). At the same time, a mobile
user's location will always be known to the network and, consequently, to service providers who can customize their
offerings according to a user's' profile and location.
The impact of wireless data communications will be observed in many domains of social and professional life. It will
particularly create new opportunities for effective marketing and advertising. We believe that the emergence of a
mobile data infrastructure, interconnected with the Internet and the Television, bring with it the advent of a new
marketing channel, complementary to traditional marketing channels and to the Internet. Products makers and service
providers are eager to integrate the new medium in their business operations, as a tool to foster and maintain strong
relationships with their prospects. But given the very personal connotation of a mobile communication, numerous
industry observers refer to permission-based marketing as the appropriate context for mobile marketing. The concept
of permission marketing is the idea that people will give their permission to allow the marketer to educate them on his
products. Permission marketing, S. Godin argues16,17, encourages consumers to participate in long term, interactive
marketing campaign in which they are rewarded in some way for paying attention to increasingly relevant messages.
Only by establishing interactive relationships with the customers, a company can over time secure repeat business and
increasing levels of expenditure.
Mobile marketing test-drives are now proliferating around the world, with Great Brittany being the laboratory of
innovation. Technologies and business models are assessed through experimental campaigns and users’ attitude
studies18. Powerful brand names are involved: McDonalds, Procter & Gamble, Nestle, Wella Design, RTL and
Channel 5. The process of market inquiry naturally focuses on successive approximations and accumulating learning.
This critical step:
i)
Requires a deep understanding of existing and upcoming network architectures and messaging standards
(from SMS to MMS19) that dictates the innovation path in mobile marketing services.
ii)
Asks for a strategy of leverage of the intrinsic characteristics of the new channel (i.e. anytime, anywhere
access to prospects) which, at the same time, respects extremely important privacy requirements.
iii)
Calls for a good perception of necessary resources, competences and complementary assets that may
create business efficiency and profitability in an emerging service industry where the appropriability
regime is relatively weak (i.e., innovation is easily imitated).
In this paper we frame the ongoing market inquiry on the perspectives of the mobile marketing by using concepts of
Industrial Organization, Technological Change theories and Permission Marketing. The structure of the article is as
follows. In section 1, we present the strengths and weaknesses of the mobile permission marketing channel while
providing an overview of the technology infrastructure (Mobile Messaging System) and its evolution towards MMS
applications. Section 2 flights over successful case studies of mobile marketing, categorizes them in terms of
objectives and targeted audiences and presents the basic technological and organizational components of a mobile
marketing campaign. Section 3 discusses the value chain of the emerging industry, provides a dynamic industry
analysis and defines resources, competences and complementary assets that are necessary to obtain “competitive
advantage”. Finally, Section 4 explores some of the ways public policy can use to conciliate the need to protect the
potential of an emerging technology and marketing channel with other issues, as privacy and consumer protection.
JEL Classification: L8, M3, O3
Keywords: Mobile Internet, permission-based marketing, case studies, disruptive technologies and firm competences,
emerging technologies and public policy
15
Morgan Stanley Dean Witter, 2000, Wireless Internet report: Boxing Clever.
S. Godin, 1999, Permission Marketing, Simon & Schuster.
17
C. Krishnamurthy, 2001, A Comprehensive Analysis of Permission Marketing, JCMC 6 (2) Jan.
18
A. Andersson and J. Nilsson, 2001, Wireless Advertising Effectiveness: Evaluation of an SMS Advertising Trial, Stockholm School of Economics,
Master’s Thesis.
19
Multimedia Message System, allowing for sending over the air, and receiving, messages incorporating text, voice, pictures, video streams.
16
55
Emerging Industry Structure (2 Sessions) – E2
E2.1 Gilles Le Blanc, Howard Shelanski, Lecturer in Industrial Economics, Ecole des Mines de Paris, France
Telecom Mergers in the EU and US: a new Competitive and Regulatory Challenge
The liberalization of telecom markets and the changing structure of regulation in Europe has led to a move in merger
review from country and sector-specific authorities to general competition bodies in the European Commission. A
similar shift has occurred in the United States, although to a lesser extent. The Telecom Act of 1996 eliminated the
FCC's ability to be the sole reviewer of telecom mergers but did not eliminate its role altogether. The FCC now
exercises a degree of concurrent jurisdiction with the Justice Department and the FTC. On the surface, this parallel
move seems to signal the prospect of increased EU/US harmonization in merger policy in the telecom sector.
A closer examination shows some important differences in both the economic motivation of mergers and enforcement
policies between the two jurisdictions. In the EU, telecom mergers tend to share the following attributes: their crossborder nature, their cross-platform dimension, and their interdependence. These characteristics have all logically
weighed in favor of merger review by general competition authorities at the EU level. In the United States, telecom
mergers have tended to be among domestic companies providing similar services, for example local-exchange
companies merging with local-exchange companies, long-distance carriers merging with long-distance carriers. The
tendency of U.S. telecom mergers to occur within markets traditionally regulated by the sector-specific authority has,
in combination with the particular institutional history of the FCC, led to a less completed shift in power to general
antitrust authorities.
A comparative examination of outcomes in the US and EU suggests that the institutional differences that remain in the
review of telecom mergers have remedial consequences. The contrasted demands in same or similar transactions
demonstrate that, for better or worse, the continued involvement of a sector-specific regulator may offer a broader
range of remedies and therefore differences in outcomes in the deals. We discuss recent cases that demonstrate this
point.
Keywords: telecoms, mergers, competition policy, networks regulation, remedies
JEL-codes: L40, L96, K21
56
E2.2 Patricia.Longstaff: Syracuse University, New York, USA
Declining Competition in Telecommunications: Could This Have Been Predicted?
Just when it looked like almost everyone (from business leaders to academics to politicians) had reached some
agreement that more competition could bring real benefits to telecommunications firms and their customers, the rules
seemed to change. Many countries attempted to “open up” their communications sector to two levels of competition:
intraindustry and interindustry. Governments encouraged the formation of new telephone companies and new
services to compete with the incumbents (intraindustry competition). They also encouraged formerly distinct
industries to compete with each other; cable would compete with telephone and wireless would compete with wires,
etc. (interindustry competition). While everyone was busy promoting competition, a wave of consolidation began that
resulted in the highest level of cooperation the communications sector has ever seen. The more governments try to
promote competition, the more cooperation seems to take place.
Applying our current ideas about competition and cooperation more aggressively is not working. It is necessary to
develop new understanding about competition and it’s opposite, cooperation. Fortunately, competition and
cooperation are not unique to human systems. Both of them operate in all biological systems, and, when you take a
close look, biology is analogous to business in many ways. The competition between jellyfish and barnacles is
surprisingly similar to the competition between different industries. The cooperation within wolf packs is similar to
the cooperative behavior within and among companies. It may seem like a long way from economics, but the
pathways between biology and business have already been blazed. (see, e.g., Hodgson, 1996).
This paper will be an expansion and refinement of the work done by the author in her new book, The Communications
Toolkit: How to Build or Regulate Any Communications Business, (MIT Press, 2002). A similar (but not identical)
paper was presented at the ITS conference in Perth in July of 200. The paper will be both interdisciplinary and
international in its outlook. It will examine several concepts that will be interesting for those trying to make sense of
the failure of competition in telecommunications.
For example, individual firms in most communications industries (not just telephone) have relied on territoriality to
gain and maintain access to resources. They have used resources at their disposal to become very “fit” for their
environment, i.e., they were able to give good returns to their owners, even though they were not particularly fast or
aggressive or efficient. Unlike incumbents in biological territories, most of these firms in many communications
industries did not need to defend their territory—governments did that for them. But as these government defenses fell
to the forces for liberalization, and new technology broke down other barriers that protected the old territories,
individual firms could be expected to try to gain new territory that they can defend. When things go up for grabs the
competing firms are faced by the same choices available in the biological world:
 Find a new resource on your present turf. This might mean using present infrastructure or expertise to sell other
services to present customers, thus finding new resources to make up for those taken away by the new competitor.
Unless the service is totally new and not a replacement of another currently available in the market, a firm should
prepare to fight current providers of that service on their turf. If the firm is a telephone company that serves
everyone on its turf, it may find itself competing with some of its own best customers (e.g., mass media firms
who use a lot of telecommunications services) as it tries to find new ways to use its assets.
 Move to a territory you can defend. If the invader whose forces are massed at your border looks unbeatable, you
may want to avoid a fight and just move on. This may mean moving to a smaller territory (one you have enough
resources to defend) or it may mean aggressively taking a territory where the incumbent is weaker than you are.
Maybe you take the resources you’ve stored up and try your luck in another industry where you may have a
competitive advantage over other individuals.
 Stay and fight, but make the competition expensive for the other side. The firm could let it be known that it will
fight to the death and that any invaders can expect to take so many casualties they will be unable to defend the
territory even if they win. The firm could also set up a “spite” situation (e.g., selling below cost) that will hurt
them but it will hurt the other side more. Or one firm could make the other’s access to a critical resource more
expensive than theirs (such as, making sure suppliers give them a better deal).
 Get bigger. Larger firms may gain access to increased resources, which will permit them to put up a better (and
longer) fight and make them appear more formidable in either a scramble or a contest; as a result, smaller
competitors will not even try to challenge the turf. An organism or firm can increase in size by forming
permanent coalitions (mergers) or temporary ones (joint ventures, alliances) or buying up competing firms to
make sure they don’t become a problem.
Some of these options are legal in most countries and others generally are not. They are, however, very predictable
reactions to increased competition. In both biological and business systems, cooperation is a typical response to
increased competition. And yet, competition itself is often seen as the goal of public policy. The author hopes her
work will begin a dialog on these issues. The new material in this paper will examine the stated goals of competition
policy in the US and the EU and ask if they are achievable with current policies.
JEL CODE: K21
Key Words: Competition Policy, Cooperation among firms, Economics and Biology
57
E2.3 Mag. Petra Rothmüller, Telekom Austria, Dr. Ernst-Olav Ruhle, 3G Mobile Telecommunications GmbH
A comparative analysis of the restructuring of former public telecommunications operators in the Europen
Union
One of the changes brought about by the complete reform of the telecommunications sector in the EU has been the
organizational and structural transformation of former public telecommunications operators. This has not only become
visible by a formal privatization of many state-owned telecom companies but also resulted from IPOs of some of
these companies. Following from this such a development has- in a number of cases – led to a complete reduction (to
zero) of the shares held by the respective state. However, there are still substantial shareholdings remaining in
government ownership.
Privatisation can take a number of different forms. At the beginning, it was mostly a formal step to move the
telecommunications operations away from the governmental organization into a “private company structure”. After
transformation to a private organization form, different actions were taken by the respective governments. Amongst
those steps, a privatisation organized as a sale of a minority or a majority of the shares on the stock market or to a
strategic investor, can be mentioned as possible policies.
Privatisation has been a process which has been going on in parallel to the opening up of markets and the change from
a monopolistic to a more competitive setting. This has reinforced the need for incumbents – apart from privatisation –
to restructure their companies in order to become competitive market players. Such internal reform comprises
amongst others structural changes in the organization, increased process efficiency and a commercialisation focusing
on new business areas. However, due to the tradition of incumbent’s behaviour and structures executing such changes
has often proven to be difficult as it requires to overcome external (political, legal) but also internal (reduction of
employees, market orientation) hurdles.
This paper analyses the process of privatization and restructuring with respect to the fixed network incumbent
operators in the European Union from 1991 until today and is structured as follows:
In section 1, a short introduction deals with the problems former monopolies had to face after liberalising telecom
markets in the different markets in the EU. As a result of privatisation the main steps of European policy making in
this field are pointed out.
Section 2 covers a comparison of ownership structures in the former monopolists as of 1991 and as of today thereby
describing the changes that have taken place with respect to a reduction of the involvment of the state. Also, the
influence of government policy existing today, which might still be of relevance despite the fact that the formal
ownership position has been reduced significantly, is pointed out.
Some case studies are presented shortly in section 3 which shall compare the privatisation and restructuring policies
which have been taken and have led to different results, e.g. also with effects experienced at the stock market (e.g.
market capitalization). This includes an analysis of stepwise privatization as the extent of each step influences the way
a company behaves in the market. It is looked at whether the step to sell off more than 50 % of the incumbent
operator’s shares is the decisive factor for a real change in the market approach (organizational structures,
establishment of subsidiaries, foreign direct investment).
The different policies described are then categorized in order to define “policy-types” which have been applied by the
member states in this process in section 4. Furthermore, we turn from past to present by pointing to some important
factors of privatization policies and by identifying key factors for the future approach of state involvement in the
telecom market especially with respect to ownership positions remaining with the government.
Section 5 summarizes the paper and draws the main conclusions.
key words: privatization, PTOs,
liberalisation, international comparison.
58
E2.4 Zulima Fernández, Mª Belén Usero, Universidad Carlos III de Madrid, Spain
The Impact of Competition and Market Liberalization on Pioneering
This paper examines under what conditions early entrants can have a higher average market share than later
entrants. Based on theory and empirical research in industrial organizations economics, resource-based view and
competitive dynamics, we construct a theoretical model on factors which affect first-mover competitive advantage and
their sustainability over time. In fact, the focus of this article is how market liberalization and the presence of new
competitors influence the first-mover advantages.
In 1993 some European countries decided to open mobile communications markets to competition but others did so
some years laters. This difference in the regulatoy policy could be very important on pioneer market share advantages.
The longer the length of time the pioneer was alone in the market, the stronger were the first-mover advantages over
time. However, increasing the years of competitive rivalry helped a later entrant to reduce the pioneer competitive
advantage. The paper analizes the impact of these important issues on competition and pioneer market share
advantages.
Our analisys is based on bimonthly data and covers most of the member states of the European Union and Norway
and Sweden from the time competition started in each country until the end of 2000. We focus on digital technologyGSM.
The results indicated that increasing the years of competitive rivalry helped a later entrant reduce the pioneer´s marker
share advantage. We also find that if new entrants have experience in analogical technology, they will can reduce the
first-mover advantage quickly within the GSM industry. At the same time, the effect of Telecom Policy is important
to promote competition in service provision between the first brand to enter a market and new entrants.
Key words: Regulation and competition, pioneer advantage, first-mover advantage, mobile telecommunications
59
E2.5 Anna Bassanini, Researcher, Dipartimento di Informatica e Sistemistica, Università di Roma “La Sapienza”,
Italy, Claudio Leporelli, Full Professor, Dipartimento di Informatica e Sistemistica, Università di Roma “La
Sapienza”, Italy, Pierfrancesco Reverberi, Researcher, Dipartimento di Informatica e Sistemistica, Università di
Roma “La Sapienza”, Italy
The co-evolution of market structures and regulatory regimes in electronic communications
The regulatory reform of electronic communications which is currently being developed within the EU highlights a
number of issues which have been discussed in recent years by the regulators of countries that are ahead in the
deregulation process, where authorities claimed their reliance in a fast and complete transition from a heavy-handed
regulatory regime to the exclusive use of competition policy rules.
The regulators’ statements were nonetheless accompanied by extensive interventions, which were intended to rule the
complex interactions among operators associated with liberalization. The necessity of these interventions is well
illustrated by the conceptual framework proposed in Bergman et al. /2/: when moving away from monopoly, the
regulatory activity first grows, and then decreases when the market becomes sufficiently competitive.
In other words, a stable competitive industry must be developed in order to allow the adoption of competition policy
rules. In the opposite case, there are no viable alternatives to regulation and it should be verified whether the role of
regulation is transitory (i.e. consists in removing obstacles to effective competition) or permanent (since effective
competition cannot be sustained).
The new European regime prescribes that the imposition or withdrawal of regulatory mandates in a given market
depends on the result of an economic analysis about its actual degree of competition. To the extent that it is based on
well-founded theoretical models and provides verifiable empirical data, the economic analysis may be helpful in
leading the transition process from regulation to competition.
However, this analysis may suffer from excessive complexity as well as a certain degree of arbitrariness. Moreover, it
may predict that actual competition cannot be attained in specific markets.
In this framework, this paper intends to discuss some crucial factors which influence the transition process, focusing
on Italy and Europe. The main elements are:
- structural characteristics of technologies and industries and their consequences on the strategic interactions
among operators;
- the limitations inherent to the available theoretical models, in the face of the uncertain environment where
regulators operate and the complexity of their goals;
- the operators’ bounded rationality.
The current strategies of incumbents and entrants in Italy and Europe are influenced by the uncertainty inherent to the
changing regulatory framework. Their main concerns regard price cap obligations for dominant fixed network
operators, cost orientation for termination charges - both for fixed and mobile networks – (see e.g. /5/), ex-ante
limitations on the price flexibility of the dominant fixed network operator (in particular as regards price discrimination
strategies), stranded costs and abuses deriving from an operator’s dominant position.
The juxtaposition of the operators’ viewpoints is reflected in the academic debate. For example, as regards access
charges, Armstrong /1/ remarks that incumbents propose the usage of the ECPR rule, while entrants prefer cost
orientation principles. It follows that theoretically better founded formulas, such as Ramsey pricing, are neglected
because of their neutrality (see e.g. /3/).
In this paper, we first analyze the main observed trends. Then, we discuss the sustainability and desirability of facilitybased competition, as well as its effectiveness in preventing joint-dominance. In particular, we consider mobile
telephony, which is characterized by the presence of multiple independent network operators. This analysis allows us
to discuss the residual scope for regulation, namely the selection of assignment procedures for available spectrum
resources (/4/).
REFERENCES
/1/ Armstrong M. (2001), The Theory of Access Pricing and Interconnection, forthcoming in Cave M., Majumdar S.,
Vogelsang I. (eds.), Handbook of Telecommunications Economics, North Holland.
/2/ Bergman L. et al. (1998), Europe’s Network Industries: Conflicting Priorities, London, Centre for Economic
Policy Research.
/3/ Cave M., Majumdar S., Rood H., Valletti T., Vogelsang I. (2001), The Relationship between Access Pricing
Regulation and Infrastructure Competition, Report to OPTA and DG Telecommunications and Post by Brunel
University.
/4/ Demsetz H. (1968), Why Regulate Utilities?, in «Journal of Law and Economics», April 1968.
/5/ Prosperetti L., Cave M. (2000), Access provisions in European communications and the 1999 review, in «Info»,
Special Edition - Telecommunications in Europe: quo vadis?, vol. 2, n. 3, pp. 235-240.
Keywords: electronic communications, market structures, regulation
JEL Codes: L96, L11
60
E2.7 Jackie Krafft, CNRS-IDEFI, Valbonne-Sophia Antipolis, France
Entry in telecommunications: an assessment of the French case
Industrial Policy Issues: Assessing the effects of liberalization and industry restructuring so far
In January 2002, the French telecommunications industry entered its fourth year of full liberalization. After a partliberalization which began in the 1990s with the development of a competitive market for mobile, equipment and
value-added services, liberalization was generalized by January 1 st, 1998 to fixed telecommunications (infrastructures
and services). Though the experience of competition in telecommunications is relatively recent in France, there is
nevertheless sufficient space to outline some key characteristics of entry both in fixed and mobile
telecommunications. Moreover, since entry appears today as one of the main issues in the field of empirical industrial
dynamics, the analysis of entrants in telecommunications can refine our common understanding of entry, especially by
validating and eventually revising basic stylized facts and results available in the recent literature.
The purpose of this paper is twofold. Firstly, this paper is dedicated to characterize major features of entry in
telecommunications by a collection of data and case studies on entrants. Secondly, the paper is aiming at comparing
basic stylized facts emphasized in recent surveys on entry with what occurs with entrants in the telecommunications
industry. With this methodology, we think that there is an opportunity to structure the future agenda for empirical
work in the telecommunications field, and also to capture more adequately the characteristics of entry in an industry
submitted to a radical technological and institutional change.
This paper is decomposed into different sections which examine for each stylized fact on entry what is the current
situation in telecommunications. Section 1 briefly describes the new context of liberalization and competition in
France, as well as key resources and methodology used in this paper to analyze the process of entry. Section 2 focuses
on the opportunity/easiness of entry in the industry and the ability of gaining a significant penetration rate. Section 3
deals with the characteristics of the waves or bursts of entry. Section 4 goes further by stressing the conditions of
survival after entry. Section 5 compares the characteristics of entrants, and especially the respective performances of
de novo entrants and entrants by diversification. Section 6 concludes.
Key words:
Telecommunications, entry, incumbents, cohorts of entrants, innovation.
JEL Codes :
L 10, L 20, L 40, L 96
E2.8 Agustin J. Ros , National Economic Research Associates, Inc. (NERA), USA
The Impact of the Regulatory Process and Price Cap Regulation in Latin American Telecommunications
Markets
I empirically examine the impact of the regulatory process and price cap regulation on the Latin American
telecommunications sector during the 1990-1998 time period. I find that the existence of an independent regulator is
positively associated with teledensity, growth in teledensity and operating efficiency. The study also finds that price
cap regulation (which should be viewed as a tightening of regulation for Latin American telcos) is associated with
increased operating efficiency but is negatively associated with growth in teledensity. Privatization and competition,
by themselves, have less of an impact on telecommunications sector performance but when coupled with an
independent regulator, they lead to efficiency gains. These results support the proposition that: those countries that do
not have an independent regulator in place in order to credibly commit are at a disadvantage, it is correct for
policymakers to tie privatization and competition with the establishment of an independent regulator, and that care
must be taken in establishing a good price cap regime in order not to negatively affect teledensity growth.
Keywords: privatization, competition, regulation, price caps, efficiency
JEL Code Nos. K2, L1, L5, L9
61
E2.9 Zimmermann, Carsten und Philip, A.T. Kerney, Germany
Battle of survival for fixed incumbent operators Revenue enhancement after commoditisation of bandwidth
The threat is apparent – incumbent operators world-wide suffer from the critical situation in the fixed line markets.
Precipitated by the ongoing market liberalisation, the transition from monopoly to competition, from regulation to
deregulation, from scarcity to super-abundance with a concomitant price and margin decrease especially in the
residual markets, fixed incumbent operators now are facing plummeting ARPUs. This development is further
accelerated by the convergence of the multimedia industry. Given the rapid technology dynamics of the Information
Revolution, the boundaries between the formerly very distinct Telecommunication, Information Technology and
Media industries are breaking down, leading to the jeopardising of the traditional market segmentation and an
invasion of the opponents market. Alternative technologies like UMTS, WLAN and VoIP pose additional threats as
they create new entry opportunities for competitors. Thus incumbent operators now need to be careful to being
relegated to the position of a mere utility bandwidth supplier or being disintermediated completely. Hence the often
discussed critical issue is how to achieve organic, profitable growth in the fixed line segment.
This paper will investigate the issue of systematic and continuous revenue enhancement for fixed incumbent
operators. A.T.-Kearney has set up a structured framework – the Revenue Growth Initiative (RGI) – which identifies
several levers to increase revenue and profitability. This approach comprises a detailed scoping phase and tailored
projects addressing the different levers for revenue growth and value creation. By carrying out an inter- and
intraindustry comparison, those fundamental factors for revenue growth potential of operators will be meticulously
examined to uncover what lies at the heart of revenue enhancement and value creation. Furthermore it will be
explained how emerging market technologies can be utilised best while parallel defending competitive market entries.
In conclusion it will be made clear that fixed incumbent operators, need to understand – viscerally, not just
intellectually – the imperative to regain market share at an increasing level of competition in order to avoid
disintermediation, even when this means challenging the fundamental of their core business.
Convergence (2 Sessions) – C1
C1.1 Arne Börnsen, A. T. Kearney GmbH, Düsseldorf
Creating a regulatory framework for converged markets in telecommunications and media
A.T. Kearney promotes a convergence order that creates a regulatory framework for converged telecommunications
and media markets
Telecommunications and Media markets converge and need a regulatory framework that improves the performance of
telecommunica-tions and media markets in Germany.
A.T. Kearney's study focuses on cornerstones of the regulatory reorganization in the telecommunications and media
markets.
Three main objectives need to be accomplished in order to facilitate convergence of telecommunications and media
markets.
1. Enhance service variety: Orientation towards service competition, Value-added services, Multi-service
integration, Broadband media
2. Leverage use of infrastructure: Multi-access platform for digital distribution, Low regulative obligations for
network operations
3. Create investment incentives: Low entry barriers for investors, Orientation on long term profits, Facilitation of
mergers and acquisitions
Key subjects of a new convergence order: EU-wide harmonization of mobile market conditions, Improvement of
regulatory efficiency, Promotion of broadband cable networks, Institutionalization of resale, Competitive access to
unbundled local loop
62
C1.2 Ignacio Bel and Loreto Corredoira, doctored professors, Angel García Castillejo, lawyer and the Deputee
Director of the CMT (Spanish Telecom Regulator body) Telematic Servíces,Spain, Jorge Abaurrea and
Martín Expósito.students Universidad Complutense, Madrid, Spain
Convergency Phenomena from the user's point of view. Internet, television and digital radio
Last year the Report about " The Media Convergence from the user's point of view. Internet, television and digital
radio" was presented in the Facultad de Ciencias de la Información de la Universidad Complutense in Madrid
(available en CD, see www.fragua.es).
In the ITS'02 we will present the main resolutions of this report. It has been elaborated inside the " Proyecto de
Investigación Telecomunicaciones e Información" (URL: www.ucm.es/info/cyberlaw) and it is one of tha aereas that
it has been worked on by the "Oficina de Transferencia de Tecnología "(OTRI) of the universidad Complutense.
We'll take into consideration the following aspects:
- Descriptive analysis of how convergence of the media on the Internet is being produced, and on the contrary the
access to Internet through other audiovisual services ( digital Tv, digital radio and so on ).
- The study of the Access to Internet in Spain: technologies, prices, necessary equipment..
- The study of Television: from the analogical one to the digital one. The study by levels of the growth of the televised
offer: Local Television, Regional TV, Cable TV , Satellite TV and TDT (Televisión Digital Terrenal)
We've paid special attention to the development of digital regional televisions and to the forming of local TV groups
with views of possible new concessions as well.
- The study of the new radio: today's DAB. The study of the difficulties of penetrating into the markets, broadcastings,
chances of the informational channels, cronology of their implantation and so on.
In the three types of media that have been studied, Internet, Television, and digital Radio the legal system is included
as the description of the agents is, and also the convergency phenomena that are used in Spain or which will be used
in the future.
The report also incorporates recomendation agreed to by the users, related to the way of access to Internet which is
most balanced in price and quality, or about the most simple and complete audiovisual equipment which can be at
home for the enjoyinent of the advantages of digital TV.
The authors have tried to use language as similar as possible to spolíen language rather than the language used by
enterprises, usually with better technological media-, to look at in their economie problems or of formation of
technological uses, that's why it is so practical.
With that purpose the authors have been "using" these services and technologies for a year- of access to Internet and
the subscription to digital televisions-, to show now the advantages and deficiencies that have been found.
JEL: L82..
Keywords: Media Law. Media convergence. Digital broadcasting. Internet access
C1.3 Yuntsai Chou: Assistant Professor Yuan Ze University Taoyuan, Taiwan
OPEN ACCESS” TO CONVERGENCE: A Comparative Study of the US, Taiwan, and Hong Kong
This paper probes the open access issue during countries’ proceeding into the broadband era. It casts doubts on that
whether or not the dichotomous sets of narrowband regulations are able deal with many issues; especially open
access, brought by technological convergence. As is known, open access does not affect Internet service providers’
(ISPs) competitiveness against facilities-based operators but may also determine competitive advantages within the
latter. The paper creates a typology of broadband regulation with respect to open access to analyze the regulatory
status of countries.
The US is asserted as asymmetric regulation by which telecommunications service providers (TSPs) abide to allow
for open access to the broadband network upon the ISPs’ request. While the cable system operators (CSOs) are
exempt for the common carrier obligation in providing broadband service. Regulatory asymmetry undoubtedly makes
the CSOs, the less regulated party, more advantageous in competing with the TSPs. In contrast, Taiwan and Hong
Kong have symmetric deregulation of open access. With sub-categorization of Type II TSPs as non-facilities-based
operators, Taiwan regulates interconnection only between Type I facilities-based operators but not open access to
Type II TSPs. In addition, a CSO must apply for the Type I license when providing information service. In this sense,
both Type I TSPs and CSOs are equally regulated, exempt from offering open access to their broadband networks
Hong Kong also made broadband regulation in 1997 to refrain Type II interconnection to broadband networks for at
least three years since the network operation.
The question we have left with is how should countries regulate their broadband network and service? Should open
access be enforced on both network operators to make regulatory symmetry? Two contrasting perspectives regarding
open access are discussed in the paper. One party focuses on the incumbent’s negative incentive to invest in
broadband infrastructure provided open access is mandated. The other contends that open access increases the
incentives for new entrants. The author then asserts a benefit-cost analysis of open access in broadband service. If,
63
under the open access requirement, the gain to the ISPs is greater than the incumbent’s reduced incentive of
investment, open access should be promulgated. Otherwise, open access should be forgone. Considering the
technology of access interfaces, ADSL is more accessible to the ISPs than cable modem. Mandating open access in
telecommunication network thus encourages the ISPs’ adoption of the ADSL technology while not compromising the
incumbent’s commercial incentive. However, the impact of open access on cable modem is less clear. Consequently,
the author suggests a broadband regulation that telecommunication networks are subject to open access while
unbundled access to the cable network is mandated wherever technically viable. That is, symmetric regulation with
open access is the ultimate goal and asymmetric regulation that enforced open access on the TSPs acts as an interim
mechanism toward the symmetric regulation.
Keywords: convergence, broadband regulation, open access, regulatory asymmetry, Type II TSPs, Type II
interconnection
JEL Code : K230, L510, L960, N450
C1.4 Eunice Hsiao-hui Wang, Department of Information & Communication, College of Informatics,
Yuan Ze University
ICT Policy Reforms in Taiwan: Coping with Convergence and Globalization
In reaction to growing convergence and globalization in the communications sector, some basics of existing
information and communications technology (ICT) policies, e.g. the traditional separation of telecommunications and
audio-visual/media regulation, are in process of destabilization. This study attempts to deal with growing
convergence problems, and in particular, from policy and market developments in Taiwan, and to highlight the
interrelationship of ICT and national developments in the information society.
There has been hotly debated that coping with converging communications, the existing practices of diverging
regulators may not deal with the problems emerged from new mediamatics services. The regulation experiences of
different countries have shown that the uniqueness of each regulatory mechanism is deeply influenced by its broader
socio-economic environment.
A regulatory restructuring strategy was proposed in Taiwan, in order to cope with the issues accompanied with the
cross-ownership of telecos and CATV operators and the burgeoning activities on the Internet. The integration of
Taiwan’s existing separate regulatory agencies for telecommunications and broadcasting into a new institution—
Information, Telecommunications & Broadcasting Commission （TIBC）is currently undertaking. It is not yet clear
at this moment whether the new institution will takeover all the regulatory functions over the Internet. Like what
some EU countries have planned to do (such as UK) or have experienced (such as Italy), Taiwan’s undergoing policy
reforms into a single regulator for mediamatics is a very sensitive issue because of the implied political power shift
between telecommunications and media institutions.
There is no universal blueprint for policy reforms. Using Taiwan as an East Asian example, this paper is aimed at
exploring several crucial issues which most Asian countries concurrently confront with, including the emerging
development of mediamatics policies, single regulator for the telecommunications, media and IT sectors; and the
feasible policy framework for converging communications.
The traditional telecommunications-broadcasting dichotomy which is usually based on technical/infrastructure
distinctions and on a category separation between mass and individual communications is being replaced by
functional distinctions. One option for a institutional change in the regulatory approach might be to separate
economic/social regulation from content regulation for the whole mediamatics sector irrespective of the old distinction
between broadcasting and telecommunication (Just & Latzer, 2000).
New telecommunications market entrants in Taiwan often complain that current competition law lacks force, does not
ensure a fair competition environment or so-called level playing field, and does not prevent unfair trading practices.
They also question Directorate General of Telecommunications (DGT) lack of the authority and a legal mandate to
clear up interconnection issues. Those increasing reforms demands coupled with digital convergence problems have
led to an integration strategy for mediamatics regulations.
Based on the idea of creation of an FCC-style, independent regulatory authority, the institutional reform blueprint for
TIBC will be proposed at the end of 2002.
Integration strategies range from coordination to fusion. The government the emerging development of mediamatics
policies, single regulator for the telecommunications, media and IT sectors; and the feasible policy framework for
converging communications.
Keywords: ICT policies; Convergence; Technology and Politics, information society, Taiwan
64
References:
Abramson, B. D. (1999). Policy globalization and the “information society”: A view from Canada.
Jussawalla, M. (1999). The impact of ICT convergence on development in the Asian region, Telecommunications
Policy 23(3/4): 217-234.
Just, N. & Latzer.(2000).
EU competition policy and market power control in the mediamatics era.
Telecommunications Policy 24:395-411.
Latzer, M. (1998). European mediamatics policies: Coping with convergence. Telecommunications Policy, 22 (6).
pp.457-466.
Wang, E. H. (1999). The Impact of ICT on Taiwan's Economic Development--An Example for Asia East.
Telecommunications Policy, 23(3/4): 235-243.
Winseck, D. (1998). Reconvergence: A political economy of telecommunications in Canada. N.J.: Hampton Press,
Inc.
C1.5 Mari Hasebe, Researcher, Global Information and Telecommunication Institute (GITI), Waseda Universtity,
Tokyo, Japan
Redefining Next Generation Reality-Enhanced Conference Interpretation Support Application Requirements
from a Holistic Man-Machine Environment Design Approach
Conference interpreting is defined as an art of intercultural communication above merely a skill set for inter-linguistic
discourse. Bridging intercultural communication gaps primarily requires the following 3 attributes; 1. meaning
centric, and 2. receiver (listener) oriented communication, together with 3. sensitivity for human interaction in the
given social context.
By taking this communicative approach to conference interpreting in the current age of information, this paper aims
to redefine next generation reality-enhanced conference interpretation support application requirements from a holistic
man-machine environment design approach.
The paper consists of the following 6 elements for consideration in designing a conceptual model for next generation
reality-enhanced conference interpretation support applications in view of the ever-increasing demand for interactive
communications/negotiations among remotely distant conferencing locations;
1. Identify key constraints and issues to the present communication process in multilateral/bilateral conference
settings and business negotiations.
2. Combine above 1. with input gained from leading edge research and development on next generation realityenhanced conference interpretation support systems.
3. Discuss the potential implications of broadband reality-enhanced conference settings to the
communication/negotiation process. Explore the communicative requirements of sharing a virtual common space
of communication.
4. Examine specific advantages of mobile communication applications in assuring the mobility of conference
participants/business negotiators and interpreters. Explore the communicative requirements of ubiquitous mobile
access to virtual conferencing in enabling the most possible efficient use of traveling time and commuting space.
5. Design a conceptual model for next generation reality-enhanced conference interpretation support applications in
view of interactive communications/negotiations among distant remote conferencing locations.
6. Based upon the analysis of above 1.to 5., provide insight in more generic terms on the horizon of communicative
approach-based holistic man-machine environments in pursuing future potentials of man-machine interaction in
the advanced information society.
Areas for future research will cover an analysis on how effective communication can be achieved through multilingual conferencing among participants in different locations (including mobile cases) with the assistance of human
interpreters and new sets of multi-media communications capabilities.
The Global Information and Telecommunication Institute (GITI) at WASEDA UNIVERSITY, in collaboration with
the Graduate School of Global Information and Telecommunication Studies (GITS), provides the following 2
distinctive research advantages on media convergence;
1. Outstanding standardization activity achievements at the International Telecommunication Union (ITU) in close
collaboration with the Ministry of Telecommunications and a number of influential fixed/mobile
telecommunication carriers and manufacturers.
2. Rich pool of technical expertise on video/audio multimedia convergence coupled with constructive interdisciplinary collaboration among 3 areas of research; info-communication, multimedia science/art, social
application for policy makers.
65
C1.6 Andrés Garrido Martín, Juan Rubio Martín, Regulation Affairs Direction, Madrid, Spain
Effects of Regulation on Innovation and Productivity: a critical Approach to the Regulation of Convergence
The document introduces convergence — which we may define as “the drawing together of previously independent or
non-existent sectors” — as a process with great impact in the current configuration of the market. This trend, which is
also a business option for companies, has been observed in the telecommunications and related sectors since the
nineties, in a context of increasing world-wide competition, with horizontal as well as vertical market movements that
have not always successfully come through.
The explosive advent of the Internet marked a discontinuity similar to other prior phenomena that accelerated
convergence — at least in the developed countries — and its high prospects of future development, which today still
remain so. Indeed, Internet represented and still does today a paradigm and a point of reference for the integration of
all types of media: telecommunications, content, broadcasting, etc.
Needless to say, in a society that is becoming increasingly more global this trend toward convergence will not be
halted in the future. However, it is difficult to guess where it can lead us, taking into account the high dynamics
fuelled by the clash between technological progress and different cultures and models of social behaviour.
Independently of this unmistakable trend, there is no doubt that telecommunications are going through a profound and
far from temporary crisis that is the result of a concurrent set of factors, which will be described.
The current economic downturn has got a negative influence, albeit not crucial, since there has been reasonable
economic stability and, in addition, growth prospects are not pessimistic. In fact, the authors believe that the benefits
of convergence are even higher than those minimally reached. Furthermore, if signs of recovery/expansion of the
economic activity were detected, expenditure and investment in convergent services would rocket, as these services
will perform a key role in the growth of long-term business productivity and profits. The exaggerated expectations
around telecommunication sector that led to over-investment deepened the effects of the current downturn, primarily
due to the large investment needed to deploy infrastructures.
However, in the opinion of the authors, “regulation” played a role in the previous over-expectation as well as in the
later outbreak of the current crisis. Some perverse effects caused by regulation will be analysed, effects that have led,
for example, to phenomena such as “slamming”, which, rather than boosting, have stalled the development of the
sector and the introduction of massive convergence services.
The postulated model of regulation is in itself a convergence of regulation and competition principles. The new
European regulatory framework has taken a step forward in this direction, however it is based on some
“presumptions” to justify "ex ante" regulation, as is the case of “dominant position”. It keeps the underlying erroneous
principle on prioritising the interests of the competitors before those of the consumers, thus setting obstacles to the
necessary economies of scale and scope to reach a critical mass of consumers in order to achieve a return from
investment efforts. Several proposals will be put forward to that exclusively address economic logic and the benefit of
consumers, as opposed to pro-competition. For example, a final price well above the cost neither has to be detrimental
nor contrary to fair competition rules.
JEL: K (Law and Economics) - K2 (Regulation and Business Law) -K21-Antitrust Law
Keywords: Regulation, Convergence, Competition, "Dominant Position",
66
C1.7 Mónica Ariño, PHD Student. Deparment of Law, European University Institute, Florence, Italy
Interactive Television and Interoperability: Advantages and Disadvantages of the MHP Solution and
Consequences for Regulatory Policy
.ITV broadly consists of the possibility to access, through the television set, a variety of services, audiovisual or not,
and to interact with those services, either by altering the content that is transmitted in the linear service, getting
additional information, or by conveying information to the broadcaster through a return channel. Digital technologies
have allowed for the provision, through the TV platform, of services that are independent from the broadcast stream;
in this sense, iTV constitutes an example of how digital convergence has dissociated networks and services making
increasingly possible for any content to be transmitted over any network and accessed from a variety of terminals.
Convergence of formerly diverse media led to a convergence of industry players wanting to provide new services,
which, in turn, called for a stable regulatory framework. Different steps were made in that direction, culminating with
the recent adoption of the Regulatory Framework for Electronic Communications and Services, where a horizontal
and technologically neutral approach to regulation is taken. Within this new framework there is a fundamental issue
related to iTV that is considered crucial for the future development of this market: to ensure interoperability of digital
interactive television services and enhanced digital television equipment (Recital 31 of the Framework Directive).
Because of its widespread penetration, multi-functional television platforms are likely to become the main vehicle of
access to the Information Society. Securing inclusiveness, in the sense of ensuring widespread access to information,
is agreed to be a public interest and a primary Community objective. This clearly has important regulatory
implications.
Currently there is a big debate on the suitability of the DVB-MHP (Multimedia Home Platform) standard as a way to
achieve interoperability for iTV. MHP is basically a standard that “defines a generic interface between interactive
digital applications and the terminals on which those applications execute. It decouples different provider’s
applications from the specific hardware and software details of different MHP terminal implementation”. The idea is
to make possible for all services and applications to run in all boxes. However, whether this is technologically and
economically feasible remains to be seen. The technical and commercial barriers to the adoption of MHP will be
presented.
In this context, what is the role to be played by regulation? The new framework favours a market-led approach to
standardisation and interoperability so that mandating the MHP standard is not an option for the moment; however, it
leaves open the possibility to mandate a standard in later stages in case the objectives of interoperability and freedom
of choice for the user are not adequately fulfilled. This paper will try to shed some light on the problematic concerning
the mandation of MHP, or any other standard, as a single standard for interactive television. The MHP case is a very
illustrative example of the classical debate of mandated standards versus market driven specifications. Although the
question might seem old fashioned there are some variants that deserve special attention. We are living in a rapidly
evolving and software-driven world with new paradigms so that any intervention on the Government side should be
extremely cautious and sufficiently analysed. It will be argued that MHP does not seem to be the only way to achieve
interoperability, which is a concept that first needs to be defined and that it would be a mistake to impose any standard
at this stage, when the market for iTV is still in its infancy and struggling to take off. Furthermore, it could even be
concluded that it is fundamentally wrong to think in terms of a single standard or a single platform in the multimedia
world, with pluriformity and divergence of developments; a more reasonable approach might be to concentrate on
building bridges between different platforms and layers, so that interoperability is seen as an evolutionary process
more than a feature. Defining the role of Governments and regulators in this process will be crucial; they should create
the necessary market conditions for innovation and competition to develop, carefully assessing the risks attached to
any intervention (or non intervention).
Keywords: interactive digital television, standardisation and interoperability, MHP, regulation.
JEL Code: L50
67
Demand Studies (2 Sessions) - DS
DS1 Paul N. Rappoport, Temple University, Lestor D. Taylor, University of Arizona, Donald J. Kridel, University
of Missouri at St. Louis, USA
"Willingness to Pay: Modeling the Demand for Broadband Services"
Modeling price responsiveness from surveys requires either very complex and expensive surveys and /or the
collection of diaries of household purchases. In this paper, the authors provide an alternative approach for estimating
price responsiveness (elasticities) directly from surveys.
We start by assuming that household demand for a product to be a function of the household’s maximum threshold
price po. This implies that the individual demand curve is defined by the relationship of the threshold price, p o to the
actual market price, p such that the purchase of product or service q is made if po ≥ p. Assuming a lognormal
distribution of the po the authors develop a class of lognormal demand functions for modeling the proportion of buyers
of product q as a function of p.
The model is applied to study the demand for residential broadband services. Information on the distribution of po is
obtained from a national survey of 1,000 households. Using the lognormal function, both an overall broadband price
elasticity and price elasticities for cable modem and DSL service are estimated. These estimates are then compared to
the author’s previously published results based on models of nested consumer choice and to current estimates of
market penetration rates based on current prices.
The paper further discusses the estimation of saturation points and potential market size, the segmentation of demand
and price responsiveness using household demographic measures, and the computation of consumer surplus.
keywords : broadband demand, willingness to pay.
DS2 Maria Lurdes Castro Martins: Assistant Professor, School of Economics and Management, University of Minho
Braga Portugal
Who are the Portuguese “un-telephoned”?
In recent years, Portuguese mobile telecommunications networks have had an amazing spread. The number of mobile
network users is now bigger than the number of households connected to the fixed-link network20. Despite this trend,
there are only a few Portuguese studies dealing with telecommunications changes and their consequences on the
universal service issue. However, many authors have already analyzed this issue as quoted in Laffont and Tirole
(2000)i.
The European Commission defines the minimum level of universal service obligations and also recognizes that valid
social objectives could be met by having some form of subsidy to some telephone access users. A 1996 commission
directive determines that only providers of public communications networks should contribute to a universal service
fund, but their contribution is required to be competitively neutral. As Waverman and Sirel (1997) ii stated this appears
to be limiting because it is difficult to build a neutral funding in such a complex system as telecommunications
markets, where incumbents, entrants, households or firms will be affected by rate and access pricing changes.
Following this directive, Portuguese public authorities defined Portugal Telecom, the incumbent firm, as the provider
of telecommunications universal service. These regulatory decisions are based on ambiguous assumptions as those of
insignificant interrelations between mobile network diffusion and the fixed access to telecommunications networks.
In this study we intend to analyze recent changes in fixed telecommunications network access demand with a
special attention given to households without telephone. There are only a few studies in Portuguese economic
literature on this subject. Cadima and Barros (2000)iii studied a related issue, the relationship between fixed and
mobile networks diffusion paths and Barros and Seabra (1999) iv studied the competition effects on universal service at
an aggregate level. Therefore, there is no Portuguese economic analysis on this subject at the household level. As the
European Commission stated in its 1996 report ''however, the lack of monitoring information (for example on
households without telephone service) indicates that some Member States are still not taking sufficient measures to
identify the ''un-telephoned'' and the reasons why they do not subscribe to services. There are still an estimated 6
million households in the European Union without telephone service'', this universal service analysis at a micro level
is an important step in measuring regulatory schemes effects.
20
According to INE, in 1997 there were 3023488 households connected to the fixed-link network and following the Portuguese regulator, Instituto
das Comunicações de Portugal, at the end of 2000 first semester, there were 5193500 individuals connected to the mobile network.
68
As the access demand is nonnegative and occurs in integer quantities, a wide range of techniques has been
implemented to deal with these issues. The household decides whether to have, or not to have, a telephone, so, access
demand variable is dichotomous. These indivisible goods demand estimation is often viewed as the estimation of the
parameters of a probability density function (PDF). This procedure enables us to determine the probability of
observing a particular demand level, given prices, income, and other variables that can be observed. The indivisible
nature of this good requires the use of a PDF only defined over nonnegative integers, Logit and Probit models 21 are
still the most common distributions used in these particular economic applications (Greene, 2000) v.
There are a set of factors, at the household level, such as age of members, number of children, household
income, work situation, telephone prices and home ownership, which are usually used to explain the access demand
decision (Wolak, 1996vi; Dhyne, 1996vii). Conditional on these attributes, access demand can be distributed according
to a probability density function. Estimation of a Logit model, using data on telecommunications access demand
yields coefficient estimates which can be used to parameterize the distribution of access demand of households facing
specific explained variables levels.
On the other hand, the household decision process has often been interpreted as a random utility model. The
observed choice having or not having a telephone reveals which of these provides greater utility to the household. The
household decides to have a telephone only in case this enables the attainment of a greater household utility level than
not to have. Assuming linearity in random utility and Logit disturbances, this demand specification equals the access
demand described in the previous paragraph.
In this study, we used a sample database collected by Instituto Nacional de Estatística in its national
household expenditure surveys, covering the periods 1989/90 and 1994/95. In the first of these two periods, 12403
households were surveyed and in 1994/95, 10554 households were surveyed. One of the questions made was if the
household had telephone, and a yes/no response was admitted.
We found evidence of significant time effects, i.e., in recent years, households are more probable to have
telephone. As other studies have found, there is evidence of positive income effect on the probability of a household
to decide to have telephone. In recent years, also households with children younger than eighteen years old are less
probable to decide to have telephone than were before. Finally, families living in rental homes or which do not own
the house where are living, are now becoming more probable to decide not to have telephone. The Portuguese “untelephoned” households seem to get low-incomes, have more than one child and are living in houses not of their own.
It would be interesting to expand this analysis to mobile access decision and verify if those who are excluded from
fixed-link network are also excluded from mobile network.
Key Words: Telecommunications; Access Demand; Panel Data; Logit.
JEL Classification: L96; L51; D12
References:
Laffont, J. and Tirole, J. (2000), Competition in Telecommunications, The MIT Press, London.
Waverman, L. and Sirel, E. (1997), “European telecommunications markets on the verge of full liberalization”,
Journal of Economic Perspectives, 11, 113-126
iii
Cadima, N. and Barros, P. (2000), “The impact of mobile phone diffusion on the fixed-link network”, Centre for
Economic Policy Research DP 2598.
iv
Barros, P. and Seabra, M. (1999), “Universal service: does competition help or hurt”, Information Economics and
Policy”, 11, 45-60.
v
Greene, W. (2000), Econometric Analysis, Prentice Hall, New Jersey.
vi
Wolak, F. (1996), “Can universal service survive in a competitive telecommunications environment: evidence from
the United States consumer expenditure survey”, Information Economics and Policy, 8, 163-203.
vii
Dhyne, E. (1996), “Private telecommunications demand in Belgium: an empirical analysis of the
telecommunications network access and use”, Cahiers Economiques de Bruxelles, 152, 425-450
i
ii
21
See Greene, 2000 for details.
69
DS3 Teodosio Pérez Amaral, Profesor Titular, Massimiliano Marinucci, Doctoral Candidate, Universidad
Complutense de Madrid, Spain
Business toll Demand using a new flexible functional form, Retina: an Applications to individual firm data.
In this paper we model the demand for different toll telephone services. We use a flexible modeling approach, relevant
transformations of the inputs network approach, RETINA, and apply it to cross section data on individual firms in
seven US States.
The data differentiate between short distance toll, long distance toll and local services. For explaining each of those
demands we used 10 different variables such as the number and type of lines, number of employees, sales, square
footage, location and other demographic data such as State and habitat size.
Modeling toll traffic is a difficult task, since precisely which are the relevant variables and which is the appropriate
functional form is unknown a priori. Moreover unknown relationships and patterns in the data may be present
accounting for heterogeneity that should be adequately treated.
We used different tools, first of all descriptive univariate and multivariate data analysis, including factor analysis and
cluster analysis that were useful to discover underlying patterns among variables and individuals and obtain an insight
of the data. The results so far suggest that nonlinearities are present among variables as well as very large extreme
values which needed to be carefully treated before the modeling process.
After this we modeled the data with RETINA, recently proposed by White, Perez-Amaral and Gallo (2002), which
allows the building and selection of a very flexible yet parsimonious econometric model in a computationally efficient
way. The method uses nonlinear transformations of the original inputs as candidate regressors, is concave in the
parameters and uses a selective search algorithm to select the promising parsimonious candidate models to evaluate.
This method compares favorably with previously available model selection techniques in experimental data.
The results so far suggest that toll demand (Taylor, 1994) is sensitive to its determinants and that the nonlinear models
suggested by RETINA improve significantly the performance over the corresponding linear models. This suggests
that the flexibility provided by RETINA may enhance the quality of the models for each individual service.
REFERENCES
Taylor, Lester D. (1994) "Telecommunications demand in Theory and Practice" Kluwer Academic Publishers,
Dordrecht.
White, H., Pérez-Amaral, T. and G. Gallo (2002) "Model Selection using the Relevant Transformation of the Inputs
Network Approach (RETINA)", working paper, 2002, ICAE, Universidad Complutense de Madrid.
Keywords: RETINA, nonparametric models, flexible functional forms, model selection, telecommunication demand
models, business demand models.
DS4 Sohlhee Yu, Alticast Corporation, Myeong-Cheol Park, School of Management – ICU, Korea
Demand Forecasting of Interactive TV service in Korea
Since digital technology has emerged in the broadcasting system, the stage of traditional television such as analog
television moves into a new stage of digital television. In a digital stage, there are many new entrants like telecom
operators in the market and appear new services that go beyond the concept of current broadcasting system. It is
expected that the convergence of telecommunications and broadcasting will convert attitude of customers in front of
television sets as well as industrial structure. Digital television offers additional data information along with A/V
signal that the analog broadcasting systems have primarily transmitted. The additional data broadcasting service
enables customers to find more information related to the program or even independent information and reflect their
interest into the broadcasting networks. That is, “one-way” broadcasting service is changed into “ interactive” service.
This change will offer new market for broadcasters, telecom network operators and even other program providers
in the information and technology industry. It is important for them to analyze the subscriber’s intention and to
forecast the potential market size such as the number of subscribers of interactive TV to make this chance to be a good
opportunity.
This study aims at forecasting the demand of interactive TV service in Korea, where the digital satellite
broadcasting service, providing data broadcasting based on MHP technology, has just started.
To estimate the subscriber’s number of interactive TV service, we assume that the subscriber consists of digital
broadcasting services such as digital terrestrial, digital cable and digital satellite broadcasting services, which have
similar relationships with iTV service.
First, we analyze the characteristics of Korean broadcasting industry and the movement into digital broadcasting
system both in a regulation aspect and in broadcaster’s aspect.
70
Second, we estimate the diffusion parameters of terrestrial, cable and satellite broadcasting services by Bass model.
Then modifying the estimated subscriber’s number by considering turning rate of analog subscribers to digital
services, we predict digital broadcasting’s diffusion parameters of terrestrial, cable and satellite broadcasting services.
Third the similarity analysis was conducted by Delphi method to compare the characteristics of the three
broadcasting services with iTV service. The similarity coefficients of each broadcasting service are used to derive
diffusion coefficient of iTV service. The broadcasting services were compared by four factors; type of contents,
charging system, policy and regulation and marketing effects & intention of subscription.
Fourth, the diffusion coefficient of iTV was derived based on the diffusion parameters of digital broadcasting
services and similarity coefficients. Finally we estimate the potential subscriber of iTV service and analyze the market
structure of digital interactive TV service. Also we examine how the digital conversion of analog broadcasting
services will progress in Korea and compare the market size of iTV service with other countries.
Keywords: digital television, demand forecasting, interactive TV, Korea, data broadcasting, digital conversion,
convergence of telecommunications and broadcasting
JEL Code: L82/ L86
DS5 Bruno Soria, Telefónica, Carlos Gavilanes, Telefónica, Argentinien
The Importance of Social Factors in the Penetration of Wireline Services
Penetration of wireline services in a country (usually measured as the number of fixed lines/100 people) has
traditionally been explained by economic factors (usually the GDP/capita). Our research shows that social factors play
as well a very important role, so that indexes that combine social and economic measurements much better explain the
actual penetrations than economic factors alone.
Specifically, we have found that there are at least three social factors that, when combined with the average income
(GDP/capita), significantly increase the correlation index with the penetration of fixed telecommunications services.
These factors are the inequality of incomes within a country (that we measure using the Gini index), life expectancy
and the education of the population (both of which we measure using the UN’s Human Development Index).
Income inequality explains the differences in demand because large inequalities show that there is a sizeable part of
the population that cannot afford services that an “average” citizen could. In the case of human development issues,
we have not yet established any causal link between demand of telecommunications and higher than average human
development, but we keep analysing three hypotheses:
1. Socially concerned societies and/or governments tend to invest a higher share of their available resources in the
production of social goods: healthcare, education and also telecommunications
2. Well-educated people place more value on communications and therefore devote a greater share of their income
to telecommunication services than less-educated persons
3. An economy with a well-educated workforce tends to develop more information-related industries and
management techniques, and subsequently economic agents demand more telecommunications services
JEL code: L96
Keywords: demand, social factors, telecommunications, human edvelopment,
inequality
71
DS6 Cinthia Campi: University of Rome "Tor Vergata", Italy
Forecasting Internet Dial-up Demand: an Emperical Estimation
Internet growth is by far the most dramatic change in the telecommunications industry of the last five years. Its spread
has been powered by spontaneous demand from millions of users, rather than promoted by telephone companies. This
new use for a telephone connection has been growing at explosive speed: for a decade, from the mid-1980s to the
mid-1990s, the number of people tapping into the Internet has doubled every twelve months. For telephone carriers, in
countries where calls are charged by duration, the Internet has dramatically increased new call revenue. Where calls
are not time-charged, growth has been even faster: in the United States, the average call to an Internet Service
Provider lasts about three times as long as an ordinary residential call, clogging the lines of some local telephone
carriers and putting pressure on telephone networks and pricing systems. Each customer represents, for a
telecommunication carrier, Internet traffic volumes, voice, and in the next future, data. Under the convergence process
in progress, all the telecommunications related services will be attached to each customer. For all carriers, an
anticipation of demand is therefore a highly valuable information.
In a new market for the diffusion of Internet, as the Italian one, the gap between current and potential users of the net
is still enormous. The number of Internet users in Italy grew considerably in 2000: 43%, compared with the previous
year. The rate of penetration is 23% of the population –still one of the lowest within the European Union countries. At
the same time, the number of “heavy users”, with a greater propensity to implement business transactions on the
network (B2C), also increased: the percentage grew from 41.9% to 53.7% of the total users. With regard to Internetenabled companies, more than one million Italian ones are now on the Internet; in 2001 the figure should top 1.5
million (source: Assinform 2001).
There are, then, the premises for an explosion of Internet demand. Understanding the evolution of Internet traffic, in
terms of connection time and users number, is in this market crucial for access and service providers.
Customers have two main options to gain access to the Internet. First, they can use a leased-line with a fixed amount
of capacity, as do most offices that are linked to the Internet. Second, users can access the Internet over the phone line
using modems, as do most people calling from their homes. I analyze the demand for the dial-up market segment: end
users include residential users and small offices, with dial-up access to the Internet.
In order to forecast Internet growth, I have implemented a logistic diffusion model. The time series is given by the
monthly dial-up traffic produced in Italy between January 1999 and December 2000 vii, separated per carrier and per
type of offer.
The model has permitted to quantify the total Internet dial-up traffic, for each month in the anticipatory trend. I have
also estimated the number of users, meant as the number of lines with Internet access. Both in the case of the total
demand and number of users, the forecast is a curve parametrized with respect to the price. In fact, the price level is
fundamental in an industry where competition among access and service providers is becoming more and more
intensive, giving way to a new wave of decreasing access tariffs and customer prices. The forecast also considers the
seasonal fluctuations of the demand, as data show that Internet dial-up traffic is very sensitive to the time of the year.
In synthesis, the forecast model, with two independent drivers –time and price level-, has permitted to get an estimate
of the monthly values both for dial-up traffic and users number.
Among the not numerous studies in the literature of the Internet industry economics, some are concerned about
pricing (see for instance Kahin and Keller, 1995; McKnight and Bailey, 1997; McKnight, Lehr and Clark, 2001;
Laffont et al., 2001), but, to my knowledge, forecasting of Internet connectivity sold to end users has rarely been
investigated (Campi, 2001).
The paper is organized as follows. Section 2 presents a model for forecasting the growth of Internet demand. Section 3
constructs the seasonal coefficients and shows the results of the total demand forecast. Section 4 completes the
analysis with the users forecast. Finally, section 5 concludes this paper with a synthesis of the main results and an
indication of the research directions still open.
Keywords: Internet dial-up traffic; Demand forecasting; Diffusion model; Seasonal fluctuations; Technological
innovation.
JEL code: L86.
Selected References
Assinform, Rapporto sull’informatica e le telecomunicazioni, Assinform, Milano, 2001.
Campi, C. (2001), Proceedings of the 5 th International Conference on Technology Policy and Innovation: “Critical
Infrastructures”, Delft, The Netherlands, 26-29 June 2001.
Kahin, B. and Keller, J. (eds) (1995), Public Access to the Internet, The MIT Press, Cambridge, MA.
Laffont, J.J., Marcus, S., Rey, P. and Tirole, J. (2001), Internet Interconnection and the Off-Net-cost Pricing
Principle, Proceedings of the IDEI Conference on “The Economics of The Software and Internet Industries”,
Toulouse, France, 18-20 January 2001.
McKnight, L.W., Lehr, W. and Clark, D.D. (eds.) (2001), Internet Telephony, The MIT Press, Cambridge, MA.
McKnight, L.W. and Bailey, J.P. (eds.) (1997), Internet Economics, The MIT Press, Cambridge, MA.
72
DS7 Changi Nam: Professor, Gyusik Lee: Doctoral Candidate, Information and Communications University, School
of Management, Professor, Taejon, South Korea
Jungmann Lee: Electronics and Telecommunications Research Institute, Techno-Policy Research Team,
Research Fellow, Taejon, South Korea
A Study on Demand Forecast for Optical Internet Access Service in Korea
In Korea, the Subscriber number of high-speed internet service (xDSL, Cable Modem) exceeded 5million(2001.3).
But the increase of demand on data and traffic, due to the increasing numbers of internet users have caused problems
for current internet service. So, most countries are striving to develop optical internet to solve the problems current
internet service confronts and the government of Korea is planning to develop optical internet in 2001. Thereupon, it
is necessary to make a research on demand forecast of optical internet access service, because of the demand forecast
of optical internet service is of great importance for Internet Service Providers (ISPs) to establish the optical internet
subscriber loop. In this study, we use Markov model and change the model to forecast demand of optical internet
access service in Korea.
Keywords optical internet access service, Markov model, demand forecasting, high-speed internet service, and
Korea.
JEL code: c53, L86, o32
Self- and Co-Regulation - Reg
Reg1 Natascha Just and Michael Latzer, ICE – Research Unit for Institutional Change and European Integration,
Austrian Academy of Sciences, Vienna
Self- and Co-Regulation in the Convergent Communications Sector: Theory and Empirical Evidence
Models of self- and co-regulation are not new in the communications sector, but have gained increased prominence
due to liberalization and globalization, which, together with the convergence of media, telecommunications and
information technologies, have resulted in reforms of the regulatory framework. The above-mentioned trends are
associated with fast technological change and transborder problems that challenge traditional statutory regulation to
the point that there is a regulatory control crisis requiring new, more flexible regulatory approaches. The slowness of
the legislative process, over-detailed rules and their lengthy transposition and implementation into national law are
often considered an impediment for technical progress and market development. For that reason policy makers on the
national and supranational levels try – inter alia – to foster alternative and/or complementary regulatory approaches
that are faster and more flexible, and reduce the problems of asymmetric information between regulators and the
industry.
We argue that the traditional, common pattern of media policy, and more generally of statehood in the communication
sector is obsolete and a new common pattern – a transformed statehood – emerges, encompassing changes of involved
political institutions, and of content and processes of regulation and control. This transformed statehood is
characterized by eight trends encompassing, among others, the trends from vertical to horizontal regulation, from
national to international regulation, and from central regulation to decentralized, technology-based self-restriction.
In this paper we analyse one important element of this transformed statehood, namely the changing division of labor
between governments and the industry, that is manifested in a trend from centralized state regulation to increased
reliance on self- and co-regulation in the mediamatics sector.
We offer a theoretical analysis of self- and co-regulation in the communication sector and present empirical evidence
of its use in the Austrian press, broadcasting, internet and telecommunications sectors. The results are drawn from a
current reseach project. The following research questions are addressed:
 How can self- and co-regulation be grasped theoretically and how can they be integrated in the regulatory
system?
 What are the advantages and disadvantages of self- and co-regulation?
 Where is self-regulation used and for what purposes? What empirical trends are evident?
 How can institutions of self- and co-regulation be categorized and analyzed?
 Which strategies are pursued on the EU level and in selected countries?
 What effects do self- and co-regulation have upon the policy network and the pursuit of public policy goals?
JEL-Codes: H1, H7, K2, L5, L8, L9, O3
Keywords: regulation, self-regulation, co-regulation, statehood,
governance, media, telecommunications, internet
73
Reg2 Johann-Georg Gross, Deutsch Telekom AG, Bonn, Germany
Moving from Regulation towards Industry Agreements
1.Current EC approach and potential pitfalls
2.The way ahead: moving towards industry agreements
3.Industry fora (Germany, Europe) and issues addressed
4.Industry Agreements - the Way Ahead
The EC regulatory model of the past was defined by two expressions:harmonisation and liberalisation. The underlying
logic: Where monopoly rights are removed, regulation of open access can be rolled back. The current regulatory
approach can be described as regulating SMP in a liberalised market, which could be accompanied by potential
pitfalls, e.g. "regulation leading to more regulation." The way ahead in a national as well as an international
enviroment can be described with "Deregulation -„Hard“ Framework and Industry Agreements as „Soft“ Interieur.
That way will be illustrated by a German (AKNN) and a European example (ETP), based on the experience since the
1st of January 1998.
JEL code : L1
Key words: Industry agreements
Technical Industry Papers - TIP
TIP1 Francisco Javier García Díaz, Public Affairs, Director (Alcatel España)
José Luis Gómez Barroso, Applied Economics Department (CC.EE. y EE. – UNED)
José Luis Machota Vadillo, Regulatory Affairs, Deputy Director (Telefónica de España)
Jorge Pérez Martínez, SSR Department (ETSIT – UPM)
Héctor Pérez Saiz, Consultant, Analyst (Telvium)
Trac System Migration and the new Uuniversal Service Obligations in Spain
TRAC system (Telefonía Rural de Acceso Celular, Rural Telephony by Cellular Access) is a wireless
communications system operated by Telefónica, the Spanish incumbent operator, using facilities of the former
analogue cellular mobile communications system. TRAC system is used for providing the fixed telephone service in
those rural Spanish areas whose difficult geographic conditions prevent telephone operators from providing this
service in normal conditions of quality. The system deployment started in 1991 and there are currently about 255,000
TRAC lines.
However, the low data communications rate of TRAC system (2,400 bps) and the boom of Internet have been
forcing the substitution of this system since halfway through the last decade in order to provide to the rural users an
appropriate data transmission rate for connecting to the Internet with a sufficient quality of service and data rate.
Finally, after several years of apparently governmental passivity, last months of 2001 have witnessed the publishing
of many pieces of news referring to the near substitution of the TRAC system.
About the TRAC migration, in 31 July, 2001, the Dirección General de Telecomunicaciones y Tecnologías de
la Información (Directorate of Telecommunications and Information Technologies) developed a public consultation
for all the telecom operators licensed to provide public fixed telephone service, and/or operate public telecom
networks.
There are many questions about the substitution of TRAC system, not only technical aspects, but also the
regulatory framework under which would be provided the new system, and the financial funds required to deploy the
new infrastructures.
The regulatory framework that would be established for this service is the critical fact because it defines the
conditions under which the operator or operators are going to provide this service. In case this new service is provided
under the regulations established in the 1998 General Telecommunications Act (Ley General de
Telecommunicaciones de 1998), the possible options could be set under a), the Universal Service regulation, b), the
other public service obligations or c), the free competence.
Nevertheless, according to the new European Regulatory Framework, TRAC system should be updated not only due
to social development reasons, but also in order to agree with the unavoidable future transposition of the Universal
Service directive to the Spanish framework. (it should be transposed in 2003).
74
Then, for regulating this new service, the Spanish regulator could either, to modify the current regulatory framework
without transposing the new directives, or to transpose the directives to create a new regulatory framework, that is,
new “play rules”.
In this paper, all these possible regulatory options will be commented in detail. Nevertheless, the subject of this
paper is far beyond the Universal Service: search for structural funds, impulse of new technologies, participation of
new agents in the provision of the Universal Service, anticipation to the future regulatory development.
Our conclusion is that it is very important to consider a regulatory framework for the new TRAC system without
collisions with other regulations. Given that the new Regulatory Framework will be soon transposed to our national
framework, all the agents would reject a regulation that does not comply with this new regulatory framework and this
would delay the deployment and operation of this new service.
As a consequence, the role of the administration should be: first, to define completely under a regulatory perspective
the unresolved aspects of the current Universal Service framework and the future aspects to be considered derived
from the European Legislation; then, to provide dynamism to the market in order to obtain the objectives marked
under coherence with the current framework and the future
Keywords:
Telecommunications, regulation, universal service, public service obligations, infrastructure, TRAC
system, Internet access
JEL Codes:
L 96, L 51, H 54
TIP2 Jorge Pérez, Sergio Ramos: GTIC, Universidad Politécnica de Madrid, Olga Gil: Universidad Autónoma de
Madrid, Pedro Huélamo: Colegio Oficial de Ingenieros de Telecomunicación
Radioelectric Emissions from Mobile Telephony Systems: Regulatory Framework, Public Policies and Social
Perception The Spanish Case
There are but a few technological developments in the history of telecommunications that can claim to have caught on
society in such a fast, beneficial and widespread manner as mobile telephony, and even fewer to have raised as many
promising prospects for the development of Information Society as those spurred by the evolution of its current
operating systems. In the course of the last decade, mobile phones have become an essential tool for trade, business
and society at large. As far as Spain is concerned, it should be stressed that, in recent years, the mobile
communications sector has managed to lead the field in terms of investment capacity, job creation and social
cohesion.
However, for several months now, there are signs revealing that the sector’s growth rate is slowing down in our
country due, inter alia, to the uncertainties about the effects of human exposure to electromagnetic fields from base
stations used in mobile telecommunications.
The main cause for concern in this context is that, more often than not, an issue as complex as this is being dealt with
on the basis of mere opinions, without taking into account the substantial efforts (scientific research, public health
policies, establishment of technical safety standards for terminals and radioelectric equipment, etc.) undertaken by
many countries, the European Union and international agencies over the years.
The aim of this article is to contribute to elucidate the uncertainties that have been raised through a comparative
analysis of the regulatory provisions and the measures adopted at Spanish, European and international level to ensure
the safety of emissions from radioelectric stations and to provide a solid footing for the social debate under way.
KEYWORDS: MOBILE COMMUNICATIONS, RADIOELECTRIC EMISSIONS, REGULATION, PUBLIC
POLICIES, SOCIAL PERCEPTION
REFERENCES
Colegio Oficial de Ingenieros de Telecomunicación: Informe sobre Emisiones Radioeléctricas de los Sistemas de
Telefonía Móvil y Acceso Fijo Inalámbrico. October 2001.
Spanish Ministry of the Presidency, Spanish Government: Real Decreto 1066/2001 por el que se aprueba el
Reglamento que establece condiciones de protección del dominio público radioeléctrico, restricciones a las emisiones
radioeléctricas y medidas de protección sanitaria frente a emisiones radioeléctricas. Official State Gazette no. 234,
29 September 2001.
Spanish Ministry of Health and Consumption, Report from the Committee of Independent Experts: Campos
Electromagnéticos y Salud. July 2001.
European Commission: Communication from the Commission on the precautionary principle. COM/2000/1 final.
EU Council: Council Recommendation on the limitation of exposure of the general public to electromagnetic
fields (0 Hz to 300 GHz). 1999/519/EC. July
75
TIP3 Frank J.Safertal, Senior Global Relationship Manager, Bechtel Telecommunications, Frederick, Maryland,
USA
GSM R – a new standard for rail telecommunications
Global deployment of GSM-R, a new standard for wireless rail telecommunications (endorsed and sponsored by the
International Union of Railways), represents an immense opportunity for wireless telecommunications industry on a
global scale. GSM-R is not a commercial telecommunications system and thus it is relatively immune to market
variations and downturns. Since the system focuses on safety, reliability, prevention of accidents and the general well
being of the traveling public, the GSM-R deployments are supported and funded by governments, multilateral finance
institutions and public.
While the GSM-R standard development and initial deployments were primarily driven by European rail operators,
several North American (Burlington Northern, Amtrak) and Asian operators (China) have expressed a strong desire
to implement this standard on their rail assets. Total global capex for rail operators known to have interest in GSM-R
implementation is between $8,000 M and $48,000 M (not including fibre backhaul and MSC’s), depending on the rf
characteristics used to predict coverage and thus the density of base stations. Using UK Railtrack capex estimates, the
global capex would be $18,000 M. Germany alone is spending $1,300 M on its current GSM-R deployment.
GSM-R facilitates interoperability of rail systems across national boundaries.
Interoperability has been a key issue for member countries of the UIC (Union International des Chemins de Fer, or
International Union of Railways).
The interoperability standards are referred to as

ERTMS (European Rail Traffic Management System) and
ETCS (European Train Control System).
The UIC appointed a study group known as EIRENE (European Integrated Radio Enhanced Network) to recommend
a suitable radio system and produce specifications to achieve interoperability. The EIRENE standards address a new
standard digital radio system known as GSM-R to achieve this. Equipment complying with such standards should
provide seamless, interoperable, train to signal box communication, control of railway rolling stock, and secure
personal communications throughout the entire European railway network. These standards have only recently been
defined.
32 members of the UIC have signed a Memorandum of Understanding (MoU) in which they agree to adopt those
aspects of the ETSI GSM standard adopted for railway operations essential to interoperability as the basis for their
new train radio systems. They have committed to implement the mandatory sections of the EIRENE specifications
when it is overall economically advantageous on a particular route to do so, thus facilitating interoperability of rolling
stock across international boundaries.
What is GSM-R?
GSM-R is essentially the same as GSM with railway specific functionality. It operates in the 900MHz band and
provides a wide range of functions such as logistics, passenger information, on board signalling, rail communications
etc.
The main drivers for its implementation are:

Safety and the need for standardised interoperability (i.e. train protection and communication technology) across
borders.

The need for the greater utilisation of tracks.

The need to supplement voice communications with data capability.

The need to update the analogue cab secure radio (CSR) communication system, currently deployed throughout
Europe.
Within the EU the implementation of the automatic train protection and communication elements have to be under
way by 2003 to comply with EU Directive 96/48/CE.
Other European countries outside the EU wishing to operate cross border services into the EU will need to comply
with the interoperability standards. Some who need to replace older legacy signalling sand communication systems
see a good business case to deploy GSM-R as a new internationally standardised system (eg India, South Africa,
North America).
Further opportunities now exist in the US as Burlington Northern Santa Fe (BNSF) Railroad company and Amtrak are
committed to GSM-R.
GSM-R uses standard GSM digital radio technology, enhanced with additional functions specifically for railway
operation. GSM-R operates in exclusive bandwidths of 876-880 MHz and 921-925 MHz allocated for up and down
links respectively. In certain countries these bandwidths may be wider.
The GSM-R radio network is built up of track-side radio cell sites. The Base Transceiver Stations (BTS) comprise the
radio equipment (transceivers and antennas) needed to service each cell in the network. It handles the radio interface
to the mobile units, which can be handsets operated by personnel or train-mounted "terminal equipment".

76
A group of BTS's are connected to a Base Station Controller (BSC) which controls a defined number of cells which
are linked to it. The BSC's provide all functions such as handover, cell configuration and control of rf power levels in
the BTS’s.
The BSC's are connected to Mobile Switching Centres (MSC) which provide overall control of the network, links to
the Public Switched Telephone Network and the other railway intelligent networks for train location monitoring etc.
The expected distance between BTS masts will be around 4km for high speed routes and 7Km for the rest. In flat
countries it may be possible to extend this spacing further. A spacing of around 2km may be required where the
terrain is hilly or the track is not straight (eg northern section of the UK West Coast Main Line). Leaky feeders or
micro-cellular BTS will be used to provide coverage in tunnels and at stations.
Communications from the MSC's to the BSC's is most likely to be provided using dedicated rail fixed SDH networks.
A mix of fibre optic cable and copper cable utilising DSL technology will provide the final links to BTS's and local
elements along the line, including signalling, line-side phones etc..
Normally one MSC would have enough capacity for a national network, although this is a risky strategy if the
building were to be damaged (eg flood or fire disaster). It is likely that most countries will have at least 2 centres
although in Germany 7 are planned.
GSM-R provides a platform for the following services:





Automatic train control
Group communication
Train diagnostics
Shunting team communication
Ticketing





Train radio communications
Addressing functions
Railroad maintenance
Schedule changes
Value added services for passengers
The EIRENE and MORANE (Mobile Radio for Railway Networks in Europe) projects were set up by the UIC to
specify, develop, test and validate prototypes of the new radio system. The EIRENE and MORANE groups have now
been disbanded but a new UIC GSM-R project group is now in charge of following-up the following issues:

Defining the operational specification for GPRS.

Completion of tests currently being carried out throughout Europe.

Specification evolution and change control.

New functionality acceptance
General Packet Radio Services (GPRS) will be a major part of GSM-R to support high speed voice and data
transmission, serving applications such as management information and providing IP interfaces to railway intranets.
Standards for this have not been agreed. It is perhaps worth noting that it is unlikely that GPRS will ever be permitted
for the ETCS function, where circuit switching is preferred due to the non-deterministic nature of GPRS, which makes
it more risky for ETCS
TIP4 Andreas Schmietendorf, T-Systems Nova GmbH, Berlin Development Center, Evgeni Dimitrov, T-Systems
Nova GmbH, Berlin Development Center, Jens Lezius, T-Systems Nova GmbH, Berlin Development Center,
Reiner Dumke, Otto-von-Guericke University Magdeburg, Faculty of Information Science, Institute of
Distributed Systems
Enterprise Application Integration Maturity, Architecture and Procedures
After a short introduction of the generic integration problem from the business and technical side, the presented article
describes challenges in the industrial and academicals area. An approach of an integration solution by the use of the
Enterprise Java Bean technology is presented in detail. Furthermore the article shows a first approach of an process
model in term of necessary integration tasks, this is similar to well known process models from the software
development.
KeywordsEnterprise application integration, business process driven integration, J2EE, integration
application, process model
77
Late Abstracts
R3.9 Alain BOURDEAU de FONTENAY, deFSK
What have we failed to learn from the post 1996 era in the U.S.?
Local telecommunications’ economies of scale and scope are the result of incumbents’ vertical and horizontal
structure, not the other way around.
The dominant paradigm in industrial organization is the production paradigm. That paradigm restricts the scope of
the sector and of the firms that operate in that sector through technology. This is the conventional way to tackle the
natural monopoly. The production paradigm is the premise behind Noam’s observation that “as the telecoms
incumbents reassert their power, based on economies of scale.” It is the foundation for the constant reference to
economies of scale and scope as a justification for the status quo.
It is the paradigm behind most of the federal policy efforts and most of the court decisions in the U.S. It is at the heart
of Powell’s “faith” when he asserts: “I'm extremely bullish about the competitive possibilities of broadband. I think
there are a number of very viable platforms that continue to emerge in the marketplace that are definitely going to be
there at the end of the race offering consumers choices on broadband.”
The 1996 Telecommunications Act just like, before it, the divestiture of the Bell System, are based upon a totally
different paradigm. In each case, policymakers did not accept the proposition that technology tied their hands and that
they could not impact the market structure. They worked on the basis of a paradigm in which incumbents used their
market power to shape the market structure they observe.
Introducing competition where the world is ruled by the production paradigm is in a way futile. This is why Noam
rejects the idea of low interconnection rates to “make it possible for competition to emerge.” This is also the
foundation of the “take-rate tyranny” stressed by the National Research Council. This is also the paradigm that
incumbents consistently use as benchmark.
Given those two conflicting paradigms, one stressed by economic analysis and the other fostered by policymakers at
different time, what can we say? This paper looks at the problem through a review of the competitive experience in
the “boom-and-bust” period since the 1996 Telecommunications Act in the U.S.
The comparison is not so hard as one might think. Teece had already shown that the production paradigm could not
be associated with the individual firm: “Unbundling (that was Ameritech’s Customer First Plan at the time, in 1992)
“confers on Ameritech's competitors whatever economies of scale and scope Ameritech possesses. Few, if any,
irreversible investments will need to be deployed by new entrants in order to compete because new entrants can
simply rent from Ameritech.” Teece’s analysis directly suggests why the production paradigm is improperly used.
This paper shows that the experience accumulated during that short competitive period and the subsequent depression
strongly supports the paradigm in which it is the market structure that determines the technology and the economies of
scale and scope, hence the need for a policy that foster the emergence of intermediate markets.
78