ARTICLE IN PRESS. Telecommunications Policy

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1 Telecommuncatons Polcy 34 (2010) Contents lsts avalable at ScenceDrect Telecommuncatons Polcy URL: On the compettve effects of moble vrtual network operators Phlp Kalmus a, Lars Wethaus b,,1 a LECG Ltd, London, UK b ESMT Competton Analyss, Berln, Germany artcle nfo JEL classfcaton: L13 L42 L96 Keywords: Competton Moble telecommuncaton MVNO Regulaton abstract Moble vrtual network operators (MVNOs) offer moble telecoms servces by purchasng capacty from moble network operators (MNOs) competng wth the latter at the retal level. Ths paper employs a two stage model analyses to what extent MVNOs may exert a compettve constrant on MNOs. In the frst stage MNOs determne both ther wholesale retal capactes. In the second stage MNOs MVNOs compete n the retal market. It s found that MNOs host MVNOs f only f the latter do not exert a compettve constrant on MNOs retal busnesses. Thus, absent access regulaton, MVNO entry may happen but s unlkely to reduce consumer prces. The results do not depend upon the scarcty of capacty. & 2010 Elsever Ltd. All rghts reserved. 1. Introducton Moble Vrtual Network Operators (MVNOs) offer moble telecoms servces to customers by purchasng capacty or wholesale mnutes from a Moble Network Operator (MNO) sellng t under ther own br to end-customers. In ths way, MVNOs avod the need to own operate ther own end-to-end moble rado access networks. The number of MVNOs n Europe has ncreased substantally over the last three years, wth seven new operators launchng n the UK alone over ths perod. Many wellknown consumer brs have launched servces, or have publcly announced ther ntent to enter the market (Ofcom, 2006, p. 76). MVNOs are nterestng both from a regulatory a competton polcy perspectve. The European Commsson (2006) has consdered MVNO entry as a remedy for unsatsfyng market performance. Yet, n lght of numerous commercal agreements between MVNOs MNOs, the European Commsson (2007) removed the market for wholesale access to moble networks (market 15) from the lst of markets to be looked nto by natonal regulatory authortes. In the proposed takeover of Portugal Telecom through Sonaecom, MVNO entry was dscussed as a remedy for the loss of one MNO n the Portuguese market for moble communcaton. 2 These proceedngs rase the queston under what crcumstances MVNOs may exert a compettve constrant on MNOs. Of course, regulated access prces may well allow MVNOs to constran MNOs. 3 However, whether MVNOs are also able to exert a compettve constrant on MNOs f access condtons are left to commercal negotatons s a dfferent queston. Correspondng author. E-mal addresses: pkalmus@lecg.com (P. Kalmus), lars.wethaus@esmt.org, lars.wethaus@googlemal.com (L. Wethaus). 1 The work contaned n ths paper was conducted when the author was a consultant wth LECG Ltd., London. 2 See Autordade da Concorrenca (2006). 3 Km Seol (2007) revew MVNO access regmes estmate the compettve mpact of mated MVNO entry nto the Korean telecommuncatons sector /$ - see front matter & 2010 Elsever Ltd. All rghts reserved. do: /.telpol

2 Phlp Kalmus, L. Wethaus / Telecommuncatons Polcy 34 (2010) Indeed, the queston of whether MVNOs exert a compettve constrant on MNOs bears no obvous answer. One mght conecture that an ncreased number of operators at the retal level ncreases compettve ntensty reduces prces for end-customers. MNOs mght refuse to offer wholesale capacty to MVNOs for ths reason. Yet, the threat that one s rval mght offer capacty rather than oneself could create a prsoners dlemma of hostng MVNOs nduce competton n the retal market. Ths paper offers a smple analytcal framework to shed some lght on these questons, employng a two-stage Cournot model wth endogenous wholesale prce determnaton. In the frst stage two MNOs decde how much capacty they allocate both for ther retal busness ther wholesale supply. Wholesale capacty s a homogeneous product,.e. operators networks do not dffer n scope connecton qualty. In the second stage MVNOs decde how much capacty to purchase from MNOs whlst MVNOs MNOs compete n the retal market. Retal servces are dfferentated. The fndngs suggest that the mere ntroducton of MVNOs does not ncrease the ntensty of competton n the retal market. Consumer prces do not decrease, rrespectve of the number of MVNOs the degree of servce dfferentaton. The reason s that MNOs choose wholesale capactes suffcently low, such that MVNOs retal servces do not compromse MNOs own retal busness. In the extreme, f MVNOs servces are a perfect substtute to the MNOs servces, the latter offer no wholesale capacty at all. If MVNOs servces are dfferentated from those of MNOs, MNOs wll offer a lmted amount of wholesale capacty to MVNOs. Yet n ths case servce dfferentaton secures stable retal prces for MNOs. Brto Perera (2008), too, analyse compettve effects of MVNOs. 4 They assume Bertr rather than Cournot competton. Consstent to the present paper, they establsh a wde parameter space n whch MVNOs wll not exert a compettve constrant on network operators. Unlke n the present study they also dentfy cases n whch MNOs face a prsoner s dlemma of hostng a MVNO, so that the latter may decrease retal prces. The successve duopoly set-up chosen n ths paper presumes that multple MVNOs are prce takers vs a vs MNOs. Ths assumpton keeps the analyss smple but gnores possble stronger barganng power of MVNOs. Brto Perera s set-up, n contrast, supposes a sngle MVNO, havng strong barganng power. The stronger poston of the MVNO lkely explans dfferent results (rather than prce versus quantty competton, per se). Very much n the ven of the Brto Perera (2008) framework, Ordover Shaffer (2007) allow for the MVNO selectng ts poston opportunstcally so as to harm prmarly ts own host. As a consequence Ordover Shaffer (2007) establshed more cases n whch MNOs grant no access to MVNOs. Armstrong (2006) revews the theory of access prcng nterconnecton. Ths lterature, however, s dstnct from the present approach as t ether consders one-way access through a monopolst or two-way access n whch each operator reles on ts compettor s access. Foros, Hansen, S (2002) argue that MVNO entry ncreases welfare f, subsequently, MNOs ontly nvest n nfrastructure. They do not dscuss whether MVNOs ncrease competton as such. Assumng Cournot competton, Dewenter Haucap (2006) fnd that MNOs grant access to ther networks even f MVNOs servces are not at all dfferentated from MNOs servces. The assumpton drvng ther result s that MNOs can extract the entre surplus from MVNOs, gven MVNOs output quanttes, MNOs maxmze profts through the number of MVNOs. Ther analyss hence abstracts from the problem of double margnalsaton the result resembles the fndngs on dvsonalsaton under Cournot competton (Baye, Crocker, & Ju, 1996; Corchon, 1991; Polask, 1992). Under smlar assumptons they also show that MNOs are less lkely to grant access under Bertr Stackelberg competton. Ths paper s also related to the lterature on successve olgopoles vertcal mergers (Greenhut & Ohta, 1979). Salnger (1988) analyses how retal prces change f vertcal ntegraton among a fxed number of upstream downstream frms changes. Ths paper dffers n consderng retal prce changes, holdng the number of ntegrated frms constant (at two), varyng the number of non-ntegrated downstream compettors. Wthn a successve duopoly framework Ordover, Saloner, Salop (1990) analyse ncentves for vertcal ntegraton vertcal foreclosure. 5 In ther model, due to lack of own retal facltes, the non-ntegrated upstream frm wll always have an ncentve to supply nonntegrated downstream frms. In the present model each upstream frm s vertcally ntegrated whch tends to lower upstream supply competton from downstream entry. McAfee (1999) Economdes (2005) analyse upstream ntegraton n a blateral duopoly. Ther settngs, however, do not nvolve non-ntegrated downstream frms relyng solely on ntegrated frms supply. Boots, Rkers, Hobbs (2004) apply a successve olgopoly approach to the European natural gas market. In ths market, (upstream) producers supply gas to (downstream) traders who compete n the market for endcustomers. Ths structure s smlar to MNOs supplyng capacty to MVNOs who sell mnutes n the retal market. Ther model yelds results that are consstent wth ours. The model of ths paper dffers, however, as not only non-ntegrated downstream supplers (MVNOs) compete n the retal market but also ntegrated upstream supplers (MNOs). Emprcal evdence on the compettve effects of MVNOs telecommuncaton markets s scarce nconclusve. In a report commssoned by the Israel Mnstry of Communcatons Mnstry of Fnance, Attenbourough, Dppon, Sorensen (2007) provde case studes on the effects of MVNO entry n varous nternatonal markets. By large the authors do not attrbute substantal prce reductons to MVNOs. In partcular they conclude that MVNOs tend to serve prevously unserved market segments rather than competng wth MNOs, they deepen wden the market. y[they] are complementng, rather than competng wth, the MNOs offerngs. (p. 74). These conclusons are consstent 4 In ther most recent verson of ther workng paper they do not refer explctly to a MNO MVNO settng anymore. 5 The model of Ordover et al. (1990) also dffers n proposng Bertr competton upstream dfferentated prce competton downstream rather than successve quantty competton.

3 264 Phlp Kalmus, L. Wethaus / Telecommuncatons Polcy 34 (2010) Fg. 1. Moble communcaton ndustry structure wth network operators MVNOs. wth ths model s predctons. The European Regulators Group (ERG, 2006) reports natonal regulatory authortes vews on whether MVNOs had an effect on competton. The anecdotal evdence s mxed. Countres such as Belgum, Estona, Sweden, France Germany dd not report strong compettve effects from MVNOs, whereas Denmark, Fnl, The Netherls Sweden dd. Indeed, as ponted out by the ERG, observed ( non-observed) compettve effects mght be due to many other reasons. Ths renders an econometrc study that controls for factors such as moble penetraton regulatory pressure hghly desrable, dsentanglng the compettve effects caused by MVNOs from those caused by other factors. 6 The paper s organzed as follows. Secton 2 presents the model comparatve statcs results. Secton 3 concludes provdes suggestons for future research. 2. The model Consder a market for moble telecommuncaton servces wth two MNOs, =1,2, n moble vrtual MNOs (MVNOs), vo ¼ 1,2,...,n. MNOs MVNOs compete for end-costumers n quanttes, q q vo. Quanttes q q vo are the amount of voce mnutes suppled to end-customers. 7 Pror to quantty competton at the retal stage, MNOs smultaneously determne nfrastructure capacty alongsde two dmensons. Frst they buld up capacty, k, to satsfy ther ntended own retal supply, q. Second MNOs exp nfrastructure capacty, k vo to compete wth each other n the supply of wholesale mnutes for MVNOs (see Fg. 1). It s assumed that there exsts a drect trval relatonshp between nfrastructure capacty, k k vo, output quanttes (voce mnutes), q q vo, of the form k q k vo q vo. One unt of nfrastructure capacty relates to one unt of output quantty. Capacty refers to base statons, glass fbre cables, mcrowave transmtters addtonal transmsson equpment rather than to rado spectrum. Whle the amount of the latter mght be fxed excessve even n the longer run, the former has to be adusted regardng actual moble traffc. Costs of capacty take the followng lnear form: C (k,k vo )=c(k +k vo ). If lumpy nvestments result n non-utlzed capacty, c=0 MNOs only determne the amount of wholesale capacty, k vo. The dem for capacty by MVNOs s derved from the MVNO s maxmzaton problem n the second stage. In the second stage, gven capacty nstalled n the frst stage, the MNOs the MVNO supply q q vo mnutes of moble communcaton servces to end-customers. For smplcty, operatng costs are neglected at the retal level. In the second stage, only the MVNO bears costs n terms of purchasng capacty from the MNOs at the wholesale prce w. 8 At the retal level, the th MNO faces a lnear nverse dem functon: P ¼ a q q g X q vo, ¼ 1,2, a, ð1þ vo 6 No econometrc study on the compettve effects of MVNOs has been undertaken so far. Yet Hastngs Glbert (2005) carred out an econometrc study of wholesale prcng of vertcally ntegrated gasolne refners n the U.S. They found hgher wholesale prces for ndependent gasolne retalers n regons close to refner-retalers. In the present context ths translates nto MNOs settng hgher wholesale prces the less dfferentated MVNOs servces. To that end the econometrc evdence s consstent wth the theory presented here n that less servce dfferentaton between the MNO the MVNO results n less (equlbrum) wholesale supply. 7 Here, Cournot competton s consdered as an approxmaton for mperfect competton n the market for moble call orgnaton. Parker Röller (1997) confrm the approprateness of ths smplfcaton emprcally. Foros et al. (2002), Wrght (2002), Dewenter Haucap (2006) lkewse consder quantty competton as an approprate approxmaton for moble markets. 8 As Ofcom (2006, p. 78) states t s essentally ths cost-asymmetry that dstngushes a MVNO from a network operator: MVNOs can avod many of the fxed costs ncurred by MNOs such as spectrum lcenses, network nfrastructure, platforms for new servces....however, snce MVNOs pay out a large proporton of ther revenues n fxed-agreement wholesale fees to network operators, ther operatng margns are far lower than those of MNOs.

4 Phlp Kalmus, L. Wethaus / Telecommuncatons Polcy 34 (2010) where a4c s the reservaton prce g,0rgr1, measures the degree of servce substtutablty between the th MNO s servce MVNOs servces from the end-customers pont of vew. In partcular a low value for g means that the MVNOs servces do not consttute a close substtute to s servce, whereas a hgh value refers to a hgh degree of substtutablty. Dfferent degrees of substtutablty may reflect, for nstance, customers preferences for certan types of prcng, marketng or br mage. Also a low value for g could be nterpreted that the MVNO targets customer segments through specfc dstrbuton channels whch are (a) not avalable to the MNOs (b) attractve to the MVNO s customer segment. For example, supermarket MVNOs (e.g. Tesco) may attract unque customer segments. Belgum MVNO Ay Yldz wth a Turksh language webste s another example of low substtutablty between MNO MVNO. In order to focus on the mpact of the substtuton parameter on the hostng decson, t s assumed that end-customers consder MNOs servces as perfect substtutes (.e. a substtutablty parameter of value one). MNOs serve the (same) mass market. The correspondng nverse dem functon facng the MVNOs can be wrtten as P vo ¼ a gðq þq Þ X q vo, vo ¼ 1,...,n: ð2þ vo The MNOs proft functons take the form p ¼ P q Retal revenuesþwx vo k vo Wholesale revenues c k þx vo Costs of capacty k vo!, ¼ 1,2, ð3þ where P s gven by (1). As dsplayed by (3) the MNOs profts consst of revenues through ther retal actvty as well as through ther wholesale actvty. In order to generate revenues n the retal market n the wholesale market, capacty n terms of nfrastructure s requred. The MVNO s proft functon s p vo ¼ P vo q vo wq vo, vo ¼ 1,...,n, ð4þ Costs of Retal revenues wholesale mnutes where P vo s gven by (2). A comparson of (4) wth (3) hghlghts the man dfferences between the MVNO MNO busness models. Frst, MNOs generate revenues through both the retal the wholesale markets; whereas the MVNO only operates at the retal level. Second, MNOs have lower margnal costs at the retal level,.e. no wholesale prce w, whereas MVNOs do not have to ncur capacty (nfrastructure) costs. Frms decsons wthn the above outlned two stage competton process are analysed n turn, proceedng backwards. That s, frst, frms equlbrum output quanttes at the retal level are derved. Wth these results at h, second, MNOs equlbrum capacty nstalments are determned Competton at the retal level (2nd stage analyss) At the retal level the MNOs,, =1,2, the MVNOs, vo, vo ¼ 1,...,n, smultaneously compete n quanttes. As wll be clear below, however, the two stage game n whch MNOs frst set capactes then engage n Cournot competton at the retal level reduces to one n whch MNOs set capactes output quanttes n the frst stage (as Stackelberg leaders), whereas the MVNOs set output quanttes n the second stage (as Stackelberg followers). The reason s the asymmetrc cost structure of MNOs MVNOs where MNOs ncur costs of capacty, f any, n the frst stage but have no such costs at the second stage (retal level). In contrast, MVNOs have operatng costs n the second stage equal to the wholesale prce set by the MNOs. To start, assume that, n the second stage, there are no capacty constrants at all. Then MNOs MVNOs would maxmze (3) (4) wth respect to q q vo leadng to, q ¼ að1þnð1 gþþþngw, ¼ 1,2 ð5þ 3þnð3 2g 2 Þ q vo ¼ að3 2gÞ 3w, vo ¼ 1,...; n, ð6þ 3þnð3 2g 2 Þ where q * * q vo denote the (hypothetcal) 2nd stage Nash equlbrum n the absence of capacty constrants. Next consder capacty constrants dstngush the followng cases: I : q ok, ¼ 1,2, II : q Zk, ¼ 1,2: In case I, capacty constrants are non-bndng MNOs set quanttes accordng to (5). In case II, capacty constrants are bndng MNOs have to supply less than q *. In fact t s optmal for them to supply k n ths case. 9 9 Note that proft functons are strctly concave n 2 p =@q 2 ¼ co0. Hence for any q oq the frst-order-condton to the network operators second stage maxmzaton problem are postve.

5 266 Phlp Kalmus, L. Wethaus / Telecommuncatons Polcy 34 (2010) In case I, the MVNO sets ts output quantty accordng to (6). In case II, the MVNO knows that the MNOs set k oq. Gven ths t s optmal for the MVNOs to maxmze p 0 vo ¼ a gðk þk Þ X q vo!q vo wq vo, vo ¼ 1,...n ð7þ vo wth respect to q vo leadng to q r vo ¼ a gðk þk Þ w, vo ¼ 1,...n ð8þ ðnþ1þ r where q vo denotes the MVNOs optmal response as a functon of the MNOs capactes, k, =1,2. To determne the second stage Nash equlbrum t thus crucal to know whether case I or case II holds n stage 2. If t s case I then frms play (q *,q *,q * vo ) n the second stage, whereas n case II frms play (k,k,q r vo ). Yet t s easy to see that case I would not consttute a subgame perfect Nash equlbrum of the frst stage because ths would leave the th frm wth unused but costly capacty (see Dxt, 1980). Rather the th frm could proftably reduce ts capacty whch s true as long as case I holds. Thus case II must hold n stage 2. If capacty s not costly n the frst stage, c=0, then MNOs could stll determne how much of ther capacty they offer n the wholesale market, k vo, =1,2. 10 Gven case II one can derve the MVNO s dem curve for wholesale mnutes usng (8). Keepng n mnd the r assumpton that one output unt q requres one unt of capacty k hence that the supply of q vo requres that q r vo Zkvo, one obtans w ¼ a gðk þk Þ ðnþ1þðk vo Þ, ð9þ where w s the wholesale prce that clears the wholesale market, gven the MNOs supply of n(k vo +k vo ) Capacty competton (1st stage analyss) Upon substtuton of k for q (k vo +k vo ) for q vo n (3) (1) the th MNOs frst stage proft functon can be wrtten as where p ¼ P k þwk vo cðk þnk vo Þ, ¼ 1,2, a, ð10þ P ¼ a k k ngðk vo Þ, ¼ 1,2 a: ð11þ The MNOs maxmze ther obectve functon wth respect to k k vo. The frst-order-condtons ¼ a k ngð2k vo Þ c ¼ 0, ¼ 1,2, vo ¼ nða ðnþ1þð2k vo Þ gð2k þk Þ cþ¼0, ¼ 1,2, a: ð13þ Solvng (12) (13 ) smultaneously for k k vo, =1,2, yelds the (unque) subgame perfect Nash equlbrum n the MNOs capacty strateges: k ¼ ða cþð1þð1 gþnþ, ¼ 1,2 ð14þ 3þ3ð1 g 2 Þn k vo ¼ ða cþð1 gþ, ¼ 1,2: ð15þ 3þ3ð1 g 2 Þn An mmedate mplcaton from (15) s the followng Clam 1. If MVNOs servces consttute a perfect substtute to MNOs servces,.e. g ¼ 1, the MNOs do not offer wholesale mnutes to the MVNO, k vo =0, =1,2. MNOs have no ncentve to offer wholesale capacty to MVNOs as long as MVNOs offer servces whch are undfferentated from those of the MNOs. An alternatve nterpretaton of ths result s that MNOs would set ther wholesale prce prohbtvely hgh such that no wholesale mnutes would be demed. Notably ths result does not depend upon the cost of capacty, c. Even f there s dle capacty, c=0, MNOs would not compromse ther own retal 10 The remanng queston s ust whether there exsts a closed form soluton to the network operators frst stage maxmzaton problem, k *, such that k rq or, else, that the closed loop soluton mples k 4q. It wll be seen below (see footnote 10) that the closed form soluton to the frst stage maxmzaton problem, k *, ndeed satsfes k rq.

6 Phlp Kalmus, L. Wethaus / Telecommuncatons Polcy 34 (2010) profts through compettve MVNOs. Accordngly one would not expect MVNOs to offer a perfect substtute to the MNOs servces Comparatve statcs Equlbrum capactes: Consder how MNOs supply capactes change n the degree of servce substtutablty. The dervaton of (14) (15) wth respect to g ¼ ða cþnð1þnð1 gþ2 w0, ¼ 1,2, ð16þ 3ð 1þð 1þg 2 ÞnÞ ¼ ða cþð1þnð1 gþ2 Þ o0, ¼ 1,2: ð17þ 3ð 1þð 1þg 2 2 ÞnÞ Eqs. (16) (17) lead to Clam 2. (a) A hgher degree of servce substtutablty, g, decreases (ncreases) MNOs supply n the retal market, k *, f the product substtutablty s low (hgh). (b) A hgher degree of servce substtutablty, g, decreases MNOs supply n the wholesale market, k vo. Proof. Frst clam: Eq. (16) s negatve ff 1þnð1 gþ 2 2g40. Second clam: obvous by (17). Hgher servce substtutablty has an ambguous effect on MNOs own retal capacty. As a drect effect, hgher servce substtutablty leads the MNO to decrease retal capacty because t ncreases retal competton, hence, lowers margnal returns from addtonal capacty. As an ndrect effect, hgher servce substtutablty results n less wholesale supply (see below) thereby decreases compettve ntensty n the retal market. Accordng to clam (a), the drect effect domnates f servce substtutablty s low whlst the ndrect effect domnates f product substtutablty s hgh. As regards MNOs ncentves to supply wholesale capacty, clam (b) confrms the ntuton developed n the prevous secton: MNOs offer more capacty n the wholesale market when MVNO s servces are dfferentated at the retal level. Next consder the change n the MNOs capactes due to a change n the number of MVNOs. The dervaton of (14) n tmes (15) wth respect to ¼ ða cþð1 gþg r0, ¼ 1,2, ð18þ 3ð 1þð 1þg 2 2 ¼ ða cþð1 gþ Z0, 3ð 1þð 1þg 2 2 ÞnÞ ¼ 1,2: ð19þ Eqs. (18) (19) mply the followng: Clam 3. If the number of MVNOs ncreases, MNOs reduce ther own retal supply ncrease ther wholesale supply. The ntuton behnd Clam 3 s that the effect of double margnalsaton decreases f the number of MVNOs ncreases. MVNOs become more compettve, lower ther retal prce to the compettve level (.e. at the level of the wholesale prce), hence, ceters parbus, wholesale offers become more attractve for the MNOs as they can capture (more of) the complete margn themselves or, respectvely, can ncrease output wth less dstortons of the retal prce. Equlbrum retal prces: Upon substtuton of (14) (15) n (11) one obtans MNOs retal prces: P ¼ a ðk þk Þ gnðkvo Þ¼ 1 3ðaþ2cÞ, ð20þ substtuton of (14) (15) for q, q q vo, where q vo ¼ k v where P vo ¼ a gðk þk Þ nðkvo lm P vo ¼ 1 n!1 3 ðaþ2cþ: Eqs. (20) (21) mply the followng & þk v, n (2) gves the MVNO s retal prces: Þ¼ 2cð gþnð 1þg2 ÞÞþað 3þ2gþnð1 g 2 ÞÞ, ð21þ 3þ3ð 1þg 2 Þn Clam 4. (a) The MNOs equlbrum retal prces are constant n the degree of servce substtutablty the number of MVNOs. (b) The MVNOs retal prce s decreasng n the degree of servce substtutablty the number of MVNOs n the market. Proof. (a) s obvous. For (b), note that the dervatve of (21) wth respect to vo =@g ¼ ða cþð2 2gþg 2 Þ=ð 2þg 2 Þ 2 vo =@n ¼ða cþð1 gþ=ð3ð 1þð 1þg 2 ÞnÞ 2 ÞZ0. &

7 268 Phlp Kalmus, L. Wethaus / Telecommuncatons Polcy 34 (2010) The fact that the MVNOs retal prce decreases n the degree of servce substtutablty to the MNOs s not surprsng. The less the MVNO manages to target dstnct customer segments, say due to specfc tarff plans or unque dstrbuton channels, the more t competes drectly wth the servce operators. Therefore the more ntense s the competton the lower ts retal prces. Also not surprsngly, the MVNOs retal prce decreases n the number of MVNOs approaches the wholesale prce level (22) f the MVNO segment becomes perfectly compettve (.e. n!1). In contrast, MNOs retal prces reman constant n the degree of servce substtutablty. Even f MNOs suppled capacty to a (dfferentated) MVNO, prces for MNOs end-customers reman as hgh as f there would be no MVNO at all. In other words MNOs support MVNOs as long as the latter do not exert compettve pressure on the former. Equlbrum wholesale prces: Substtuton of (14) (15) nto (9) yelds the wholesale prce determned by the MNOs equlbrum retal wholesale supply, k * k v : wðk,kv Þ¼a gðk þk Þ ðnþ1þðkv þk v Þ¼ 1 3ðaþ2cÞ: ð22þ Clam 5. The equlbrum wholesale prce, wðk,kv Þ, s equal to the MNOs retal prces hence constant n the number of MVNOs, n, the degree of servce substtutablty, g. The ntuton behnd Clam 5 s that MNOs strctly prefer allocatng capacty to that busness, wholesale or retal, that yelds hgher returns n terms of hgher prces. Hence as long as w4p, MNOs would only nstall wholesale capacty, whereas, f wop, MNOs would only nstall retal capacty. In any equlbrum wth postve wholesale retal capactes the wholesale the retal prce must be equal. 11 That sad, n realty one may well observe wholesale prces beng lower than retal prces. Ths s because the smple model gnores dstrbuton costs. Wth dstrbuton costs one would have that wholesale prces should equal retal prces net of dstrbuton costs;.e. one observes wholesale prces lower than retal prces. 3. Concluson Ths paper clarfes several effects related to the ntroducton of MVNOs. In the smple model, absent access regulaton, MVNOs do not exert a compettve constrant on MNOs. MVNOs that have smlar busness plans to MNOs are reected by them. MVNOs wth dfferentated busness plans do not exert compettve pressure on them. MNOs make sure that they balance ther wholesale offer fnely wth the degree of substtutablty of the MVNOs busness model. Notwthstng the lmtatons of a stylzed smplfed model the analyss may provde some gudance for practtoners. Frst, successful MNO MVNO busness relatonshps appear to hnge on MVNOs superor access to certan customer segments. Wthout such access ether the MNO or the MVNO ncurs some opportunty losses. Second, regulators may not expect MVNOs, as such, to stmulate competton n moble communcaton markets. By the same token, thrd, a smple pledge of hostng MVNOs may turn nto a poor remedy for MNO mergers. It appears lkely that competton authortes regulators would need to determne access condtons f they am at to ncrease competton. As mentoned n the ntroducton, n lght of the alternatve approaches by Brto Perera (2008) Ordover Shaffer (2007) the analyss of MVNO access seems to hnge on the (mplct) assumptons on the underlyng barganng power of MNOs MVNOs. Future research should address partes barganng power more explctly. The present analyss, for example, could be extended through a prelmnary (Nash-) barganng stage whereby partes barganng powers depend on the number of MNOs MVNOs as well as the extent of MNOs excess capacty. A further extenson regards potental upstream ntegraton by MVNOs. Whle MVNOs may enter wth lttle or no nfrastructure, they could develop ther own nfrastructure over tme reduce ther dependency on MNOs. Ths mght ncrease the compettve pressure they mpose on MNOs, but on the other h decrease the lkelhood of obtanng favorable access condtons n the frst place. 11 It remans to be shown that q Zk. By (5), (14) (22) ths amounts to showng that where að1þnð1 gþþþngw 3þnð3 2g 2 Þ Z ða cþð1þð1 gþnþ, 3þ3nð1 g 2 Þ w ¼ 1 3 ðaþ2cþ: Substtuton for w rearrangng terms gves ð1þnþ½að 1þgÞgnþcð 3þð 3þgþ2g2 ÞÞnŠ Z0 3ð 1þð 1þg 2 ÞnÞð 3þð 3þ2g 2 ÞnÞ whch s true snce the denomnator s strctly postve, the numerator s non-postve whle the fracton has a negatve sgn.

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