Telecom Regulation: Competition in Input versus Output Market

Analyst Blog

Jan. 6, 2013, 8:34 p.m.

In the input market, mobile network operators demand spectrum, which is essentially a factor of production; in the output market, they supply cellular services. One can imagine how the market structure in the former influences that in the latter. The controversy surrounding the spectrum screen review in the United States presents a case in point. While Republican commissioners worried that any tightening of the screen could dampen participation and hence competition and revenue in an upcoming auction (the input market), the Competitive Carriers Association feared that not doing so would reduce competition in the output market.

There appears to be a trade-off between competition in the input and output market under some circumstances. To maximize competition in the latter, I did a thought experiment in which spectrum is held and infrastructure deployed by one separate entity, reaping economies of scale and driving cost down, while all operators will lease the network to provide wireless service to consumers, effectively becoming mobile virtual network operators technically speaking. Instead of incurring astronomical capital expenditure individually, they only need to pay a low fee and therefore face low barriers to entry. The conundrum, of course, is that the monopoly will have every incentive to abuse its market power. The Kenyan government responded by establishing a public-private partnership, through which it can partake in the investment and the leasing of the network. That way, operators of different sizes can compete on an equal footing. In addition, the cost saving from network sharing makes the government’s target of achieving national coverage by 2013 much more feasible.

However, it remains to be seen how the public-private consortium will actually charge operators for accessing the network. The pricing objective and contract design – e.g., revenue-sharing versus fixed fee – of the 4G Special Purpose Vehicle will ultimately affect risk efficiency, competition and the (bridging of) digital divide within the country, as discussed in  our recently published ABI Insight .