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Network Competition: IS250 Spring 2010 Chuang@ischool - Berkeley.edu

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52 views15 pages

Network Competition: IS250 Spring 2010 Chuang@ischool - Berkeley.edu

Uploaded by

Shubham Ranka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Network Competition

Business Strategy, Industry Structure

IS250
Spring 2010

[email protected]
Summary
Market segmentation, service differentiation, and
bundling strategies can improve producer revenue, but
raise questions on neutrality of the network

Vertical integration and horizontal mergers are driven by


scale and/or scope economies, but may increase market
concentration to the detriment of competition and
consumer welfare

John Chuang 2
p
Recap: Monopoly, Consumer Surplus

Duopoly, and 1

Perfect Competition p*
p(q) = 1 - q

q
q* 1
Producer Revenue
Dead Weight Loss (DWL)

Q* P* Producer Consumer Total Dead


Surplus Surplus Surplus Weight
Loss
Monopoly 0.5 0.5 0.25 0.125 0.375 0.125

Duopoly 0.75 0.25 0.1875 0.28125 0.46875 0.03125


(Stackelberg)

Perfect 1 0 0 0.5 0.5 0


Competition
John Chuang 3
Telco Business Strategy

Imagine being the CEO of a telco, cable


company, or ISP:
- Convergence means more competitors
- Service increasingly commoditized (which
leads to more intense price competition)
- Fixed costs as high as ever
Life as a regulated monopoly was so
much easier!
John Chuang 4
How to Increase Revenue?
p
Price discrimination
- Market segmentation 1
- E.g., business vs. residential
- Personalized pricing p(q) = 1 - q

Service differentiation q
- E.g., video vs. email data 1

The debate on Network Neutrality

Implications to consumer, producer and social welfare

John Chuang 5
p
Consumer Surplus

Comparisons 1

p(q) = 1 - q
p*

q
q* 1
Producer Revenue
Dead Weight Loss (DWL)

Q* P* Producer Consumer Total Dead Weight


Surplus Surplus Surplus Loss
Uniform pricing 0.5 0.5 0.25 0.125 0.375 0.125
(Monopoly)
Personalized 1 0-1 0.5 0 0.5 0
pricing
Market 0.75 0.5, 0.25 0.3125 0.15625 0.46875 0.03125
segmentation
Duopoly 0.75 0.25 0.1875 0.28125 0.46875 0.03125
(Stackelberg)
John Chuang 6
: specific example from previous slide, with two market segments of 50% each
Source: Bakos and Brynjolfsson, 2000

Bundling
p p QuickTime and a
decompressor
are needed to see this picture.

+ =
q q

Multi-product pricing
Rationale: reduce dispersion in WTP for bundle
Example: voice, video, data (triple-play)
- Consumer 1 WTP: $40, $40, $40
- Consumer 2 WTP: $10, $10, $100
- Sell voice, video at $40 each, data at $100 --> Revenue = $180
- Sell bundle at $120 --> Revenue = $240

John Chuang 7
Management Control

Vertical integration
Horizontal merger
Determinants:
- Technological efficiencies (+)
- Transactional efficiencies (+)
- Market imperfections (-)

John Chuang 8
Vertically Related Markets

Upstream/downstream relationship
Examples:
- Steel: ore & coal mines; steel mills
- Software: OS; applications
- Telephony: local access; long distance
- Internet: physical transport; internet access;
content/services

John Chuang 9
Vertical Integration

Good:
- economies of scope savings
- internalize transaction costs
- reduce prices & increase total welfare
Bad:
- if one component is monopolistic; possibility
of foreclosing competition in other component

John Chuang 10
Vertical Integration Example

Telephony was vertically-integrated industry


- AT&T (Ma Bell) offered end-to-end solution
Divestiture in 1984
- Local service (the seven baby bells)
- Long distance service (AT&T)
(Re-)Integration in 2005:
- SBC acquired AT&T ($16B)
- Verizon acquired MCI ($7B; Qwest had rival offer)

John Chuang 11
Horizontal Merger

Proposition: Economies of scale


Objection: concentration leads to market power
and reduction in competition
- No network externality benefits (all networks are
interconnected anyway)
- Larger network has less incentive to interconnect, or
to maintain a high quality interconnection, with
smaller networks
- Larger network has negotiation power over smaller
networks

John Chuang 12
Horizontal Merger
Example 1: Local Telephony
Seven Baby Bells Merging
- AT&T: SBC + Pacific Bell +
Ameritech + Bell South
- Verizon: Nynex + Bell Atlantic
(+ GTE)
- Qwest: US West

Facilities-based competition
- e.g., wireless, cable, satellite, fiber, PLC,

John Chuang 13
Horizontal Merger
Example 2: Internet Backbone
- MCI-WorldCom (Sept 1998; $37B; MCI backbone divested to
Cable & Wireless)
- WorldCom-Sprint (Oct 1999; $129B; rejected by DoJ and EU
2000)
50,000 Fiber system route miles
40,000
30,000
20,000
10,000
0 (UUNET)

IXC
AT&T Sprint MCI* Qwest Level 3
Williams
WorldCom
1995 1997 1999E
John Chuang 14
Source: Kende 2000
Summary
Market segmentation, service differentiation, and
bundling strategies can improve producer revenue, but
raise questions on neutrality of the network

Vertical integration and horizontal mergers are driven by


scale and/or scope economies, but may increase market
concentration to the detriment of competition and
consumer welfare

John Chuang 15

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