Access Prices Indexed to Geographical Coverage of Innovative Telecom Services
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Access Prices Indexed to Geographical Coverage of Innovative Telecom Services David Henriques1,2 Received: 23 December 2019 / Revised: 29 April 2020 / Accepted: 4 August 2020 / © The Author(s) 2020
Abstract The literature on access prices and investment has suggested that firms under-invest when subject to an access provision obligation combined with a fixed access price per consumer. In this paper, I study an access price per consumer for an innovative service such as superfast broadband provided by a regulated firm that is a function of its geographical coverage (indexation approach). The indexation approach can enhance economic efficiency beyond what is achieved with a fixed access price under a set of standard assumptions. In particular, it can simultaneously induce the firms to set lower retail prices, lead to wider geographical coverage of innovative services and higher social welfare level compared with a fixed access price. Moreover, in the model, the indexation may be used to achieve approximately the Ramsey outcome, or the first-best coverage level. I address how a regulator can set the access price indexation optimally, based on the coverage cost plus an incentive. I highlight the potential role of indexation as a tool to reduce the need for public subsidies and the associated tax distortions when compared with a fixed access price. Keywords Geographic coverage · Innovation · Investment incentives · Price controls JEL Classification L43 · L51 · L96
1 Introduction Motivation A key concern for Europe and the USA is the timely rollout of innovative high-speed broadband services. The European Commission (2016) has set a target for all European homes to have access to a download speed of at least 100 Mbps by 2025, while the Federal Communications Commission (2016) has set a goal for all US Americans to have access to affordable, high-quality broadband. These high-speed services have the potential to offer considerable benefits to businesses to remain or become more competitive, allow David Henriques
[email protected] 1
London School of Economics and Political Science London, London, UK
2
RBB Economics, London, UK
Journal of Industry, Competition & Trade
consumers to benefit from advanced online services that improve their quality of life, and induce significant growth across major economic sectors (Czernich et al. 2011). Fibre optics is one of the fastest technologies for content transmission (both downloading and uploading), allowing for significantly faster and wider transmission of information than current copper-based networks. However, the private sector has been reluctant to invest in a large-scale deployment of Next Generation Access Networks (NGA), namely fiber-based networks.1 Insofar as the fiber rollout cost increases substantially when population density falls, this has led to concerns on the ability of firms to extend geographical coverage outside major urban areas. One reason for under-investment in NGA coverage relates to the inability of firms to capture the full social benefit f
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