Post on 13-Aug-2020
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Telecommunications industry and economicgrowth: How its market structure matters
Vahagn Jerbashian
CERGE-EI
September 8, 2011
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Motivation - Empirical and theoretical resultsMotivation - PoliciesObjectives - Growth, market structure, and policiesTelecom features - Products, market, and firmsTelecom features - Investments and innovationTelecom features - Network externalities
Motivation - Empirical and theoretical results
Empirical studies suggest that the telecommunication industry(telecom) has a significant contribution to economic growth
Emphasized channels: infrastructure investments; network externalities
e.g., Roller & Waverman (2001); Czernich, Falck, Kretschmer, &
Woessmann (2011)
The literature suggests that the market structure of an industrycan matter for its contribution to economic growth
Emphasized channels: innovative activities; ineffi ciencies stemming from
imperfect competition
e.g., Nickell (1996); van de Klundert & Smulders (1997); Aghion, Bloom,
Blundell, Griffi th, & Howitt (2005)
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Motivation - Empirical and theoretical resultsMotivation - PoliciesObjectives - Growth, market structure, and policiesTelecom features - Products, market, and firmsTelecom features - Investments and innovationTelecom features - Network externalities
Motivation - Policies
Many recent policies propose changes in the market structure oftelecom and have initiated such changes already
e.g., the Telecommunications Act of 1996, in the US; thedirectives 90/388/EEC, 96/19/EEC, 2002/22/EC, and2002/58/EC in the EU
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Motivation - Empirical and theoretical resultsMotivation - PoliciesObjectives - Growth, market structure, and policiesTelecom features - Products, market, and firmsTelecom features - Investments and innovationTelecom features - Network externalities
Objectives - Growth and market structure
This paper analyses how the market structure of telecom mattersfor its contribution to long run growth in terms of innovation byincumbents and entrants; and
shows how the competition type in telecom market can matterfor that contribution;
suggests the direction of policies that can deliver higherwelfare in the decentralized equilibrium;
evaluates several implications of the recently implementedpolicies;
focuses on the productivity improvement in telecom
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Motivation - Empirical and theoretical resultsMotivation - PoliciesObjectives - Growth, market structure, and policiesTelecom features - Products, market, and firmsTelecom features - Investments and innovationTelecom features - Network externalities
Telecom features - Products, market, and firms
Telecom firms
produce imperfectly substitutable products (e.g., wireless andland-line services)
operate in monopolistic environment
are known to be relatively large and long lasting firms
e.g., Vodafone was created in 1983 and in 2011 its marketvalue is $148bln
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Motivation - Empirical and theoretical resultsMotivation - PoliciesObjectives - Growth, market structure, and policiesTelecom features - Products, market, and firmsTelecom features - Investments and innovationTelecom features - Network externalities
Telecom features - Investments and innovation
Telecom firms
carry substantial investments before the entry to the markets
e.g., they build infrastructure in order to provide their services
enhance their productivity through continual investments,after the entry
e.g., digitalization of networks
engage in R&D partnerships and cross-licensing activities(Hagedoorn 1993; 2002)
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Motivation - Empirical and theoretical resultsMotivation - PoliciesObjectives - Growth, market structure, and policiesTelecom features - Products, market, and firmsTelecom features - Investments and innovationTelecom features - Network externalities
Telecom features - Network externalities
The products of telecom firms create two types of positive networkexternalities amongst their users (Gandal, 1995)
Direct Network Externalities increase the value of using atelecom good with the number of users
In the light of productivity improvement in telecom, the"number of users" is replaced by "effective number of users"
Indirect Network Externalities stem from existence ofdifferent types of telecom goods, given that a user of atelecom good can access other telecom goods also
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Market structure, welfare, and growth (1 from 2)Results - Market structure, welfare, and growth (2 from 2)Results - Market structure/entryResults - Policy discussion/theoretical recommendationsResults - Policy discussion/substitutability
Results - Market structure, welfare, and growth (1 from 2)
In decentralized equilibrium
the market structure of telecom matters for social welfare dueto imperfect competition in telecom market
the demand for telecom goods is lower (compared with the sociallyoptimal one), while the productivity improvement in telecom goodsis one of the drivers of economic growth
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Market structure, welfare, and growth (1 from 2)Results - Market structure, welfare, and growth (2 from 2)Results - Market structure/entryResults - Policy discussion/theoretical recommendationsResults - Policy discussion/substitutability
Results - Market structure, welfare, and growth (2 from 2)
In decentralized equilibrium, when there is finite number oftelecom firms,
changing the market structure or the toughness of the competition(Cournot vs. Bertrand; Sutton, 1991) affects the productivityimprovement in telecom and the demand for telecom goods
increasing the number of firms or toughening the competitionincreases the social welfare
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Market structure, welfare, and growth (1 from 2)Results - Market structure, welfare, and growth (2 from 2)Results - Market structure/entryResults - Policy discussion/theoretical recommendationsResults - Policy discussion/substitutability
Results - Market structure/entry
Depending on economy, there are two cases in decentralizedequilibrium
the entry to telecom either stops after some number of firmshave entered
endogenous barriers to entry
the entry continues forever
monopolistic competition, in long run
In social optimum
there is permanent entry
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Market structure, welfare, and growth (1 from 2)Results - Market structure, welfare, and growth (2 from 2)Results - Market structure/entryResults - Policy discussion/theoretical recommendationsResults - Policy discussion/substitutability
Results - Policy discussion/theoretical recommendations
The results suggest that the policies which can improve the welfarein decentralized equilibrium
subsidize the production of telecom goods (or the demand)
allow free entry and subsidize it, if needed, in order toguarantee permanent entry
subsidize the investments for productivity improvement
the last two points tend to be overlooked in the recentlyimplemented policies (e.g., the Telecommunications Act of1996)
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Market structure, welfare, and growth (1 from 2)Results - Market structure, welfare, and growth (2 from 2)Results - Market structure/entryResults - Policy discussion/theoretical recommendationsResults - Policy discussion/substitutability
Results - Policy discussion/substitutability
Recently implemented policies may have increased thesubstitutability between telecom goods
e.g., the Telecommunications Act of 1996 mandates numberportability and motivates interconnectedness
(i) this type of policy is not in-line with social optimum, wherelower substitutability implies higher welfare
(ii) in competitive equilibrium its effect is ambiguous, when thereare no exogenous barriers to entry
(iii) in case of exogenous barrier to entry (and exit) increasing thesubstitutability can deliver higher GDP growth rate
thus it may deliver higher welfare
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
MethodologyFormalizationFinal good production sideTelecom - Telecom good productionTelecom - Firm entryHousehold side
Methodology (1 from 2) - The type of the framework
This paper uses a general equilibrium framework
it can explicitly suggest how the telecom can affect the growth
it can suggest the general equilibrium effects of policies
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
MethodologyFormalizationFinal good production sideTelecom - Telecom good productionTelecom - Firm entryHousehold side
Methodology (2 from 2) - Important building blocks
Most notably, the framework developed in this paper incorporates
firm entry to telecom market
in order to endogenize the market structure of telecom
innovation in telecom by incumbents
trade of patents (production instructions; knowledge forproduction) in telecom
stands for R&D partnerships and cross-licensing
direct network externalities
not endogenous; do not drive the main results of the paper
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
MethodologyFormalizationFinal good production sideTelecom - Telecom good productionTelecom - Firm entryHousehold side
Multi-sector endogenous growth model for telecom
Two sectors
Final good sector
Final good producers produce a homogenous good Y , which isthe numeraire good
Telecom
Each telecom firm produces a distinct type of telecom good x
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
MethodologyFormalizationFinal good production sideTelecom - Telecom good productionTelecom - Firm entryHousehold side
Final good production side
The representative producer’s problem:
maxY = X µX σL1−σY
s.t.
X =
(N∑j=1x
ε−1ε
j
) εε−1
µ > 0, ε > 1, σ ∈ (0, 1)in equilibrium X = X
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
MethodologyFormalizationFinal good production sideTelecom - Telecom good productionTelecom - Firm entryHousehold side
Telecom good production
Given the (inverse) demand of telecom good the jth(∀j = 1, ...,N) producer’s problem is
maxCournot : Lxj ,Lrj ,{uj ,i ,ui ,j }
Ni=1;(i 6=j)
Bertrand : pxj ,Lrj ,{uj ,i ,ui ,j }Ni=1;(i 6=j)
Vj (t) =∞∫t
πj (τ) exp[−
τ∫tr (s)ds
]dτ
s .t.
πj = pxj xj +N∑
i=1,i 6=jpuj ,iλj
(uj ,iλj
)−(Lxj + Lrj
)w −
N∑
i=1,i 6=jpui ,jλi
(ui ,jλi
),
xj = λjLxj
λj = ξ
[N∑i=1
(ui ,jλi
)α]
λ1−αj Lrj ; uj ,j ≡ 1, ξ > 0, 0 < α < 1
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
MethodologyFormalizationFinal good production sideTelecom - Telecom good productionTelecom - Firm entryHousehold side
Telecom - Firm entry
The entrant borrows the resources for entry investment Sfrom household with the interest rate r .
The investment is in terms of final good and has itsproductivity η.
The creation of the distinct type of telecom good is given by
N = ηS
η > 0
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
MethodologyFormalizationFinal good production sideTelecom - Telecom good productionTelecom - Firm entryHousehold side
Household side
A continuum of identical and infinitely lived households of massone
Each household is endowed with constant amount of labor, L
Household’s optimality problem:
maxU =
∞∫0
C 1−θt
1− θe−ρtdt
s.t.
A = rA+ wL− Cθ > 0, ρ ∈ (0, 1)
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Exogenous barriers to entryResults - Endogenous entryResults - Endogenous entry case 1 (1)Results - Endogenous entry case 1 (2)Results - Endogenous entry case 2
Results - Exogenous barriers to entry
Economic growth is higher if the number of telecom firms is higherand/or the competition is tougher in any of telecom markets(Cournot vs. Bertrand; Sutton, 1991)
g - GDP growth rate; L - Lerner index(1) - Bertrand competition; (2) - Cournot competition
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Exogenous barriers to entryResults - Endogenous entryResults - Endogenous entry case 1 (1)Results - Endogenous entry case 1 (2)Results - Endogenous entry case 2
Results - Endogenous entry
Depending on household’s preferences and production technologiesthere are two cases in the economy
Case 1 —endogenous barriers to entryCase 2 —permanent entry
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Exogenous barriers to entryResults - Endogenous entryResults - Endogenous entry case 1 (1)Results - Endogenous entry case 1 (2)Results - Endogenous entry case 2
Results - Endogenous entry case 1 (barriers to entry)
The number of telecom firms is finite and constant; it can bederived from a zero profit condition
Under Bertrand competition
NB = (ε− 1)ξL− ρ
σ
ε(ξL− ρ
σ
)− ξL [(θ − 1) (σ+ µ) + 1]
Under Cournot competition
NC = (ε− 1) ξL [(θ − 1) (σ+ µ) + 1]
ε(ξL− ρ
σ
)− ξL [(θ − 1) (σ+ µ) + 1]
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Exogenous barriers to entryResults - Endogenous entryResults - Endogenous entry case 1 (1)Results - Endogenous entry case 1 (2)Results - Endogenous entry case 2
Results - Endogenous entry case 1 (barriers to entry)
Telecom contributes to economic growth through productivityimprovements in telecom good production
Economic growth increases with the scales of direct networkexternalities
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Exogenous barriers to entryResults - Endogenous entryResults - Endogenous entry case 1 (1)Results - Endogenous entry case 1 (2)Results - Endogenous entry case 2
Results - Endogenous entry case 2 (permanent entry)
On balanced growth path
there are infinitely many telecom firms
telecom contributes to economic growth through theproductivity improvements in telecom good production andthrough growth in the number of telecom firms
toughening the competition and increasing the number oftelecom firms does not affect economic growth
economic growth increases with the scales of direct networkexternalities
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Competitive equilibrium vs. social optimum (1)Results - Discussion of policies
Results - Competitive equilibrium vs. social optimum
Due to price setting behavior of telecom firms and the directnetwork externalities the market price of telecom good is notequal to its marginal value (and cost)
In competitive equilibrium there is under-investment inproductivity improvement
In addition, the returns on investments decline with entry offirms in competitive equilibrium, in contrast to social optimum
In social optimum there is permanent entry, in contrast to thecompetitive equilibrium where there can be endogenousbarriers to entry
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011
Motivation and researchOutline of results/contributions
Methodology/The modelResults/conclusions - 1Results/Conclusions - 2
Results - Competitive equilibrium vs. social optimum (1)Results - Discussion of policies
Results - Discussion of policies
The policies that deliver socially optimal allocations as acompetitive equilibrium outcome
subsidize the production of telecom goods (or tax the demand)
subsidize the investments for productivity improvement
allow free entry and subsidize it, if needed, in order toguarantee permanent entry
Policies which increase the substitutability between telecom goodsare not in-line with social optimum
Vahagn Jerbashian (CERGE-EI) DEGIT-XVI, St. Petersburg, Russia, September 8-9, 2011