Essays in telecommunications economics: Analysis of UNE-P pricing and bundling

In this dissertation I examine some of the issues that emerged as a result of the deregulation of local voice markets in the United States. I also evaluate an impact of the rapid advance of broadband and cellular services on telecom industry. In the first chapter I analyze how regulatory policy with respect to setting lease charges for local network affects competition, investment, and retail prices in the telecommunications industry. To do so I formulate a model of dynamic competition between incumbent and competitive local exchange carriers and cable companies, which provide landline voice and broadband services. The model is simulated for 3108 counties in the continental United States. I find that if lease charges were set at the FCC-prescribed total element long run incremental cost levels, investment would increase and prices fall in counties containing about 80 percent of population. Chapter 2 examines what would happen to telecom competition if lease charges were completely deregulated, and landline market incumbents were free to set them at levels that would maximize their profits. I consider pressure from cellular market providers as a possible source for restraining market power of landline incumbents. Theoretically, for sufficiently high degree of substitution between cellular and landline telephony an incumbent may prefer to accommodate entry by setting low lease charges. However, calibrating demand and supply to represent current state of the industry, I show that in the absence of regulation an incumbent will always choose to set prohibitively high lease charges to prevent competitors from entering landline phone market. The results are robust to the choice of parameter values. In the third chapter I study use of bundling as a strategy for competing in telecom services. I show that bundling broadband with a monopoly service is a profitable strategy when an opponent does not bundle. However, if both players bundle broadband with their respective monopoly products, gains from product differentiation are dissipated. In this case both firms earn less than what they earn when supplying their services unbundled. Finally, I analyze how the likelihood of bundling evolves when relative market sizes for products change.