Long term versus short term regulation: A model of investment behaviors in the Telecommunications Sector

David Flacher & Hugues Jennequin Paris 13 University – CEPN – CNRS UMR 7115 – France [email protected] [email protected]

ABSTRACT We address the question of the regulation criteria that should be used in order to maximize welfare due to FTTH (Fiber To The Home) development. To answer this question, we propose a model comparing traditional asymmetrical regulation to the absence of such regulation. The model is detailed for the case of two firms. The first one represents the operators that can (or that are willing) to invest into FTTH. The second one represents the operators that are not ready (or that do not want) to take this risk. The model, inspired from Foros (2004) and Kotakorpi (2004), is extended to two periods in order to capture a key dimension of the investments involved in the FTTH market: We introduce a dynamic effect of FTTH on the consumer utility, related to investments. In fact, in our game model, we make the assumption that consumers’ utility increase more in the second period that in the first one because such investments need time to be fully efficient (the killer applications have to be found). Our simulations show that regulating the FTTH local loop unbundling access price can be counterproductive not only from the total welfare point of view but also from the consumer surplus one. The absence of traditional unbundling regulation could thus be a better option, at least during a long enough period. We finish the paper suggesting that other policies, such as industrial policies, could provide an even better regulation that no regulation at all.

KEYWORD Regulation, FTTH, investment, telecommunications