Restructuring in network industries: competition and mergers in telecommunications

136 Pages·2001·4.8 MB·English

by  Jamison, Mark A

RESTRUCTURINGINNETWORKINDUSTRIES:COMPETITIONAND
MERGERSINTELECOMMUNICATIONS
By
MARKA.JAMISON
ADISSERTATIONPRESENTEDTOTHEGRADUATESCHOOL
OFTHEUNIVERSITYOFFLORIDAINPARTIALFULFILLMENT
OFTHEREQUIREMENTSFORTHEDEGREEOF
DOCTOROFPHILOSOPHY
UNIVERSITYOFFLORIDA
2001
Copyright2001
By
MarkA.Jamison
Tomywife(Patti),mychildren(JohnandLaura),
andmyparents(JohnandJudae)
ACNOWLEDGMENTS
Imustfirstthankmysupervisorycommitteemembers. Dr.DavidE.M.
Sappington,thechairofthecommittee,tooknumeroushourstogivedirectionandadvice
andtocorrecterrors. Hisknowledgeandinsightwereinvaluable. Dr.StevenSlutsky,a
member,providedimportantguidancethroughoutmygraduatestudiesandwasaquick
studyofmymanyefforts. Dr.ChunrongAi,amember,providedexpertadviceon
econometricproblemsandthepresentationofeconometricstudies. Dr.HeatherElms,
theexternalmember,gavegooddirectionandinsightsbeyondthenormalrangeof
economics. Iherebythankthemallagain.
Outsideofmysupervisorycommittee,IamgratefultoDr.SanfordBerg,who
madeitpossibleformetocometotheuniversity,andwhoseopinionsandleadershipare
respectedworldwide. IamalsoindebtedtoDr.W.AndrewMcColloughforhisforesight
inallowingDr.Bergandmetoembarkontheenterprisethatwehavebuiltatthe
university. IamalsogratefulforadvicefromDr.WalterBeckertandDr.DavidFiglio.
Aspecialthankyouisduetomycolleague,JaniceHauge,withoutwhomgraduate
studieswouldhavebeenimpossible.
IwouldalsoliketothankEricChiang,JoshSilverboard,JasonMills,EileenPun,
Verizon,Sprint,SBC,andBellSouthfortheirassistancewithdata. Thanksarealsodue
toJamesSichterofSprintandMarkSievers,EdLowery,andLinkHoewingofVerizon
fortheirwillingnesstodiscussissuesandprovideinsights.
IV
Lastly,IwouldliketothankallofthePublicUtilityResearchCenter(PURC)and
departmentalstaffthathavemadetheworldworkduringmytenureasastudent. Cynthia
StehouwerandtherestofthePURCstaffkeptmyprojectfinancesandtasksinorder;
MistySwainkeptmygraduateprograminorder;DianStudstillkeptalladministrative
mattersflowing;andDorthyPadgettprovidedimportantassistanceinproducingmy
book.
TABLEOFCONTENTS
Page
ACKNOWLEDGMENTS iv
ABSTRACT viii
CHAPTERS
1 RESATNRDUCMTEURRGIENRGSIINNNTEETLWEOCROMKMIUNNDIUCSTARTIIEOSN:SCOMPETITION 1
2 MARKETCONCENTRATIONANDINCENTIVESTO
DISCRIMINATEAGAINSTRIVALSINNETWORK
INDUSTRIES 5
2.1 Introduction 5
2.2 TheModel 10
2.3 Symmetric,SingleMarketCase 17
2.4 MonopolistEntryintoaCompetitiveMarket 18
2.5 NewCompetitiveEntryintoaFormerlyMonopolyMarket 20
2.6 Conclusion 24
3 NETWORKINTERCONNECTIONANDTELECOMMUNIATIONS
COMPETITION: THECASEINTHEU.S 26
3.1 Introduction 26
3.2 LiteratureReview 31
3.3 HistoricalBackground 33
3.4 TheModels 39
3.5 ModelResults 54
3.6 Conclusion 63
4 NETWORKEXTERNALITIESANDCROSS-BORDERMERGERS
INNETWORKINDUSTRIES 64
4.1 Introduction 64
4.2 TheModel 69
4.3 QualityChoices 75
VI
4.4 AnalysisofPureCross-BorderMergers 79
4.5 MixedMergers 88
4.5 Conclusion 93
5 CONCLUSION 95
APPENDICES
A PROOFSANDLEMMASFORCHAPTER2 99
B APPENDIXFORCHAPTER3 107
C PROOFSANDLEMMASFORCHAPTER4 HO
REFERENCES 119
BIOGRAPHICALSKETCH 125
«
VII
AbstractofDissertationPresentedtotheGraduateSchool
oftheUniversityofFloridainPartialFulfillmentofthe
RequirementsfortheDegreeofDoctorofPhilosophy
RESTRUCTURINGINNETWORKINDUSTRIES:COMPETITION
ANDMERGERSINTELECOMMUNICATIONS
By
MarkA.Jamison
May2001
Chairperson:DavidE.M.Sappington
MajorDepartment:Economics
Thisdissertationaddressesthreeissues. Thefirstiswhetherlargeservice
providersinnetworkindustries,suchaslargeInternetbackboneproviders,havean
incentivetodiscriminateagainsttheirsmallerrivals. UsingCoumotinteractions,each
networkprovidersimultaneouslychoosesquantity,qualityforcommunicationswithinthe
provider'sownnetwork(internalquality)andqualityforcommunicationsbetweenthe
provider'snetworkandothernetworks(externalquality). Largernetworkschoosehigher
internalqualitythandosmallernetworks. Allnetworkschooselowerexternalquality
whenconnectingwithsmallernetworks. Largenetworksandsmallnetworkschoose
identicalexternalqualitywheninterconnectingwitheachother. Lastly,incumbent
providersaresometimeswillingtoraiserivals'percustomercosts,butnevertheir
interconnectioncosts.
Thesecondissueishowregulatorypoliciesrelatingtonetworkinterconnection
affectentrants'incentivesandabilitiestoenterlocaltelecommunicationsmarketsand
vm
expandsupply. Ifindthatlowpricesforresellingincumbents'services,leasingfacilities,
andexchangingtrafficincreaseentry,buttimeforentry,accesstoincumbents'buildings,
andreformofuniversalservicesubsidiesdonot. However,ifpricesforleasingfacilities
arelowrelativetoincumbents'retailprices,thenlessentryoccurs,presumablybecause
incumbentsexertefforttoprotecttheirretailprofits. Higherpricesforexchangingtraffic
increaseentrants'marketshare,presumablybecausetheytargetcustomers(suchas
InternetServiceProviders)whoreceivemorecallsthantheymake. Lowpricesfor
resellingservicesdonotcauseentrantstochooseresellingoverothersupplymethods.
Thethirdissueishowmergersaffectmarketperformanceinanetworkindustry.
Networkproviderschoosequalityforcommunicationswithintheprovider'sown
network,qualityforcommunicationsbetweentheprovider'snetworkandothernetworks,
andoutput. Thedissertationshowsthatcross-bordermergersprovidefirmswithan
incentivetoincreaseindustryoutputbecausemergersallowfirmstointernalizepositive
networkexternalities. Thedissertationfurthershowsthatcross-bordermergersimprove
thewelfareeffectsofhorizontalmergersincertaincircumstances. Lastly,mergersthat
arebothcross-borderandin-marketincreasewelfareiftheaggregatesizeofthemarkets
thatthepre-mergerfirmshadincommonbeforethemergerislargerelativetothe
aggregatesizeofthemarketsthattheyindividuallyservedbeforethemerger,andifthe
valuecustomersplaceonnetworkexternalitiesishigh.
ix
CHAPTER
1
RESTRUCTURINGINNETWORKINDUSTRIES:COMPETITION
ANDMERGERSINTELECOMMUNICATIONS
Thisdissertationconsistsofthreestudiesoftherestructuringofcommunications
industries.
ThefirststudyexaminesmarketconcentrationintheInternet. Thisisoneofthe
issuesthatcausedthecollapseoftheWorldCom-Sprintmerger. Iexamineanoligopoly
modelinwhichfirmssimultaneouslychoosequantities,networkqualityforinternal
communications(internalquality),andinterconnectionqualityforcommunications
betweennetworks(externalquality). Ishowthatfirmsbasetheirqualitychoiceson
networksize,customervalueofinterconnection,andthecostofinterconnection.
Networkschooselowerexternalqualitywhenconnectingwithsmallernetworksthan
whenconnectingwithlargernetworks. Largernetworksandsmallernetworkschoosethe
sameexternalqualitywhenintercormectingwitheachother. Ialsofindthatlarger
networkswillnotoptimallychoosetosabotagerivalsbyraisingtherivals'costsof
interconnection.
Idevelopandexplainmyresultsbyapplyingastaticoligopolymodel. Firms
haveidenticalcostfunctionsofprovidingquality,butmayhavedifferentcostfunctions
forproduction. Costasymmetriesarisefromdifferencesinnetworksizes. Anincumbent
canraiseitsrivals'costs,forexample,bydelayingaccesstoessentialfacilities. Firms
1