‘The Affordability of Utilities’ Services in the EU: Extent, Practice and Policy’

CCP’s Autumn Seminar Series continues on Friday 13th November with our very own David Deller (CCP) evaluating ‘The Affordability of Utilities’ Services in the EU: Extent, Practice and Policy‘. The seminar is based on an extensive research project that David has undertaken with Catherine Waddams (CCP) for the Centre on Regulation in Europe (CERRE). The findings of the project are available here, and an abstract for the seminar can be found below.

Abstract

The affordability of utilities (energy, water, telecoms and transport) is a major issue on European policy agendas. This seminar reports the key findings from a recent research project into this topic conducted for the Centre on Regulation in Europe. Key results are highlighted from the most comprehensive mapping of utility affordability in the EU yet compiled and analysis of household-level expenditure data from countries including the UK, France and the Republic of Ireland. Major findings are the stark differences in expenditure shares devoted to utilities between ‘old’ and ‘new’ Member States and the pitfalls of using high-level affordability metrics to evaluate the performance of policies designed to improve utility affordability. The empirical results will be complemented by overviews of different metrics that can be used to evaluate utility affordability and the effectiveness of policies used to tackle fuel poverty.

 

David’s presentation takes place from 13:00-14:00 in the Thomas Paine Study Centre, Room 1.03. 

‘Unbundling the incumbent: Evidence from UK broadband’

On Friday 20th September, the CCP Seminar Series returns for the Autumn semester with another interdisciplinary line-up of presentations on competition policy and regulation.

To officially open proceedings, we are delighted to welcome Professor Tommaso Valletti (Imperial College London) who will be presenting his article on Unbundling the incumbent: Evidence from UK broadband‘ which he has written with Mattia Nardotto (University of Cologne) and Frank Verboven (University of Leuven). An abstract for his seminar can be found below.

Abstract

We consider the impact of a regulatory process forcing an incumbent telecom operator to make its local broadband network available to other companies (local loop unbundling, or LLU). Entrants are then able to upgrade their individual lines and offer Internet services directly to customers. Employing a very detailed dataset covering the whole of the UK, we find that over the course of time, many entrants have begun to take advantage of LLU. However, unbundling has little or no effect on broadband penetration, compared to those areas where the loops are not unbundled. LLU entry instead has a strongly positive impact on the quality of the service provided, as entrants successfully differentiate their products upwards compared to the incumbent. We also assess the impact of competition from an alternative form of technology (cable) which is not subject to regulation, and what we discover is that inter-platform competition has a positive impact on both penetration and quality.

For further information on the CCP Seminar Series, including a programme of speakers for this semester, visit our website.

Policy Brief: Market Structure, Regulation and the Speed of Mobile Network Penetration

BACKGROUND

In the context of a growing market with consumer network externalities, the speed of a new product’s market penetration is an important summary measure of how well the market is performing for potential consumers.

Mobile network penetration has been expanding rapidly in recent years, although there are signs it is reaching maturity in advanced countries.

There is an important difference between mobile networks and more traditional markets because spectrum limitations have been addressed by strict licensing of operators. This eliminates the threat of entry as a mechanism by which competition works.

METHODOLOGY

  • The aim of the paper is to identify those structural features of a partly regulated market that provide the best competitive environment to maximise the market penetration of a new product: mobile telephony.
  • The focus of the analysis is on three structural features: the number of firms, the conditions of ownership (private versus state), and the existence and independence of an industry regulator.
  • A supplementary issue is whether the effect of a more competitive market structure works mainly through the average price level as distinct from non-price-level elements.
  • The analysis draws on data from a sample of thirty countries over the sixteen years (1991-2006) in which average penetration rose from 2% to 97% of the population. The dataset includes a range of market structures from monopoly up to seven networks.

KEY FINDINGS

  • The history of market structures is found to matter: the analysis reveals that the speed of consumer uptake is maximised in the presence of five firms.
  • Findings are consistent with the view that relatively few firms may be sufficient for competition in relatively homogeneous product markets.
  • More provisionally, it is found that market structure effects do not appear to work exclusively through the level of prices.
  • Digital technology, standardisation, privatisation and independent regulation are also important positive factors.
  • Findings also cast light on how consumers respond to competition between multiple standards: diffusion is faster when there is standardisation.

POLICY ISSUES

Findings are consistent with the view that a balance may need to be struck between investment incentives for network industries characterised by large sunk costs and the benefits of an apparently more competitive market structure, but this balance may require five firms.

This finding is particularly relevant when determining the number of spectrum licenses to be granted, but it is also relevant for merger policy.

Findings additionally support the view that private ownership and independent regulation are also desirable in the absence of an entry threat.

ABOUT THE AUTHORS

Yan Li is a Lecturer in Strategic Management in Norwich Business School, Bruce Lyons is Deputy Director of the ESRC Centre for Competition Policy, and Professor of Economics in the School of Economics, at the University of East Anglia

The original Policy Briefing is available for download here, the Working Paper on which this Briefing is based is available here.

Policy Brief: Effect of Regulatory Reform on the Efficiency of Mobile Telecommunications

BACKGROUND

Regulatory reform of the mobile telecommunications sector has been introduced in recent years to improve productivity and competitiveness.

Non-parametric Data Envelopment Analysis (DEA) and parametric Stochastic Frontier Analysis (SFA) have often been presented as competing methodologies since they use different procedures to define the efficient frontier. The debate on the robustness of these two performance measurements is receiving growing academic attention.

METHODOLOGY

  • The authors examine the effect of different aspects of reform on productivity and its constituent parts in the mobile telecommunications sector.
  • The study focuses on the performance of 22 mobile network providers from seven countries over the period 1998-2007.
  • The authors exploit the difference between competing methodologies to add robustness to conclusions. The results of a stochastic production frontier function approach and a data envelopment analysis methodology are compared in order to address some of the criticisms which have been levelled at each methodology.
  • All the estimated measures of efficiency, total factor productivity change, efficiency catch-up and technological innovation under the two approaches are further analysed econometrically in relation to the impact of mobile sector reforms.

KEY FINDINGS

  • The authors find robust evidence that competition and independent regulation improve firm efficiency.
  • The results of the analysis imply that it is not necessary for firms to be privatised to be more technically efficient. But privatised firms are more capable of enhancing their total factor productivity growth, efficiency catch-up, and technological innovation in the production process in a shorter time period compared to their public counterparts.
  • Comparison of DEA and SFA results suggests that the measures of efficiency and total factor productivity are somewhat sensitive to the choice of methodology. To be confident in the outcomes of analyses, comparisons of performance across decision-making units (and years) need to be checked for robustness using different methodologies.

POLICY ISSUES

The most robust finding of the study is the positive effect of competition on both levels and growth in firm efficiency. This finding has profound implications for the design of markets. In an area which is sensitive both from a political and business perspective, governments and regulators should encourage active rivalry between four or five firms. However, extending such competition to more entrants may have little, or negative, impact on the productivity of the participants.

ABOUT THE AUTHORS

Yan Li is a Lecturer in Strategic Management in Norwich Business School, Catherine Waddams is a Professor of Regulation in Norwich Business School.

The original Policy Briefing is available for download here, the Working Paper on which it is based is available here.

New Working Paper: Local Loop Unbundling

Richard Cadman, a part-time PhD student at the Centre, has published a new working paper (12-8) on the topic of Local Loop Unbundling in the UK:

A “reference offer” for Local Loop Unbundling was first published in the UK in December 2000, but by the end of 2005 just 2% of competitive copper access lines used LLU, compared with 56% in France. In 2005 Ofcom, introduced policy changes to commercialise LLU, which has increased to around 70% of competitive copper access lines. This paper measures the impact of Ofcom’s policy changes and concludes that these policy changes induced both the innovation and diffusion of LLU. The paper concludes that it is insufficient for regulators simply to mandate access: they must also ensure commercially attractive, non-discriminatory terms.

You can download the paper here.

The 2012 series of working papers is here.

New Working Paper: US Telecoms

Authored by CCP member Yan Li and Russell Pitman (Antitrust Division, US Department of Justice and New Economic School, Moscow), this new working paper (12-7 in the series) looks at the proposed merger of AT & T and T-mobile:

From the beginning, the debate on the likely results of the proposed acquisition of T-Mobile USA by AT&T focused more on the claims of the parties that “immense” merger efficiencies would overwhelm any apparent losses of competition than on the presence or absence of those losses, and the factors that might affect them, such as market definition. The companies based their “economic model” of the merger on estimates of efficiencies on AT&T‟s “engineering model”, without addressing the credibility of the results of the latter in the context of the economics literature on the telecommunications sector. In this paper we first argue that the economics literature on economies of scale (especially) and economies of density in mobile telephony suggests caution in expecting such massive cost reductions from increasing the size of an already very large firm. We then present new econometric evidence from an international data base supporting the notion that most large mobile telephone service providers have reached the point of constant or even (rarely) declining returns to scale.

Download the paper here.

The full 2012 series of Working Papers is here.