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Saturday, September 28 • 2:35pm - 3:10pm
A Quantitative Approach to Include Time and Innovation in Traditional Market Analysis

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Telecommunications markets enjoy frequent technological, service and business innovations. Those innovations very often change radically the industry economics and the competitive advantages of incumbent players and frequently allow new entrants to make inroads into the industry.

At the same time, telecommunications industry is either heavily regulated or at the least, faces close and continuous scrutiny by competition authorities. However, regulatory authorities usually assess the competitive situation of the industry using static equilibrium models that fail to consider the competitive effects of innovation. As a consequence, those market analyses do not properly represent the actual market behavior, and may lead the authorities to make decisions that drive the market into unexpected and undesired outcomes.

We propose an alternative economic model to analyze the telecommunications market, that of dynamically contestable markets. We combine the insights of the contestable market theory developed by Baumol, Panzar and Willig with our own analysis of innovation processes in the telecommunications markets and their impact into the competitive behavior of both incumbents and potential entrants.

The paper's methodology will have the following steps: An overview of telecommunications economics and drivers of industry structure; An analysis of innovation processes in telecommunications and their impact on industry structure; An analysis of the role of time in the evolution of market structure upon the launch of an innovation, including the main time parameters: innovation rate, relaxation time, fixed asset life, break even time; An assessment of the limitations of static equilibrium models (perfect competition and contestable markets) to represent the effects of innovation and investment in the telecommunications industry; A proposal of a dynamically contestable markets model, including a discussion of the conditions for this model to be applicable to a specific industry and the behavior of rational players under this model; A high level empirical analysis of the proposed model in two dimensions: Historical innovation rates in the telecoms market; Case studies of incumbent and potential entrant operator responses to actual or anticipated innovations; A summary of the conclusions and a discussion of their implications for policy making.

We expect to show that the innovation rate in telecommunications market has been so high that the market structure has not usually had time enough between every two of them to return to equilibrium. Therefore, static equilibrium models are not suitable to analyze them, even less to design regulatory obligations. We expect telecommunications markets to fulfill the conditions to be classified as dynamically contestable, where the competitive behavior of rational agents will be disciplined by the threat of triggering innovation in competitive technologies or business models that may lead to competitive entry into the market.

We expect our work to provide some guidance about how to more accurately analyze the behavior of real world telecommunication markets, as well as high level criteria to decide whether this model could be applied to analyze other markets that are also highly innovative and capital intensive.

avatar for Bruno Soria

Bruno Soria

Director Regulatory Services, Telefonica

Saturday September 28, 2013 2:35pm - 3:10pm PDT
GMUSL Room 221

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