Tuesday, November 25, 2008
Posted by D. Daniel Sokol
Gijsbert Zwart, CPB Netherlands Bureau of Economic Policy Analysis, Tilburg Law and Economics Center and Michiel J. Bijlsma, CPB Netherlands Bureau of Economic Policy Analysis discuss Competition for Access: Spectrum Rights and Downstream Access in Wireless Telecommunications.
ABSTRACT: We study downstream entry and capacity choice in the market for wireless elecommunications, where licenses to use radio spectrum - an essential input - are in the hands of vertically integrated oligopolists. Prior to network construction these incumbents may offer contracts for capacity to an entrant, granting service-based access on the network they will construct. Alternatively, when spectrum trading is allowed, they may sell part of their license, allowing the entrant to build its own network and enter as an infrastructure player. We find that in this cournot setting access is generally provided, as incumbents compete to appropriate the profits of serving a differentiated market through the entrant. Although selling spectrum rights instead of network capacity leads to a loss of economies of scale in infrastructure construction, infrastructure-based entry may dominate as a result of a strategic effect. By delegating capacity choice to the entrant, the access providing incumbent can commit to compete more aggressively, causing its rival to reduce capacity.