Strategic Cross-Subsidies and Vertical Integration in Opening Telecommunications Markets

F. Gasmi ; J. J. Laffont ; W. W. Sharkey

Professor of Economics, University of Toulouse (IDEI, GREMAQ), France, Tel: +33-0-561128597 gasmi@cict.fr
Professor of Economics, University of Toulouse (IDEI, GREMAQ), France laffont@cict.fr
Senior Economist, Federal Communications Commission, Washington DC, USA, Tel: +1-202-418-2807 wsharkey@fcc.gov

JEL Classification: L00, L51, L96

Abstract

This paper analyzes the strategic role of cross-subsidies under vertical integration. We consider an incumbent firm which operates in a regulated market (switched telecommunications service) and a competitive market (unswitched service). Fitting cost data generated with an engineering cost proxy model to smooth functional forms, we first assess the extent of cross- subsidies due to allocation of common costs and managerial effort. We then focus on the cost incentives of the regulatory scheme in the regulated segment and identify situations where the incumbent may blockade entry in the competitive segment.

Keywords:

Industrial organization, Economics of regulation, Telecommunication

References

Federal Communications Commission. “Regulatory and Policy Problems Presented by the Interdependence of Computer and Communications Services and Facilities.” Final Decision and Order, 28 F.C.C. 2d 267, (Computer I), 1971.
Federal Communications Commission. “Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer Inquiry).” Final Decision, 77 F.C.C. 2d 384 (Computer II), 1980.
Federal Communications Commission. “Computer III Remand Proceedings: Bell Operating Company Provision of Enhanced Services.” CC Docket No. 95-20, CC Docket No. 98-10, Report and Order, 7 (Computer III), 1999.
Gasmi, F., Kennet, D. M., Laffont J. J., and Sharkey, W. W. Cost Proxy Models and Telecommunications Policy- A New Empirical Approach to Regulation. MIT Press, Forthcoming in 2002. [https://doi.org/10.7551/mitpress/2191.001.0001]