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Entrance of Cable TV Service Provider into Broadband Internet Service Market : Service Bundling and Role of Acces
s Charge
ByJae-Hyeon Ahn, Jungsuk Oh, Sunghee Shim
September, 2004
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Contents
Ⅰ. Introduction research background and objectives
Ⅱ. The Model basic setting and variables definition
Ⅲ. Analysis
Ⅳ. Conclusions results, limitation & further study
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Convergence of Network and Service
Bundling and Tying of Telecommunications Service
Conflict with Incumbent Player with Essential Bottleneck Facilities
Access Charge Issue
Research Background
Broadband Internet Service Market
Incumbent(Bottleneck Facilities)
Cable TV Service Market
Entrant BundlingBundling
Ex. – Cable Service Provider (SO) & Telecommunications Service Provider (KT)
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Modeling Competition in Broadband Internet Service Market
Incentives for Bundled Service Impact on Incumbent Player
Access Charge Level that Maximizes Social Welfare
Research Objectives
Broadband Internet Service Market
KT(possessing bottleneck facilities)
Cable TV Market
SO BundlingBundling
ModelingModeling
Analysis of Broadband Internet Market
Analysis of Social Welfare
Analysis of Broadband Internet Market
Analysis of Social Welfare
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The Model – basic setting
Difference from previous research models
BundlingBundling
One-Way-AccessOne-Way-Access
Previous Model
BundlingBundling
One-Way-AccessOne-Way-Access
The Model
+
Cable TV Broadband Internet
Cable TV Broadband Internet
Essential facilities of the Incumbent
Essential facilities of the Incumbent
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The Model – basic setting
Firm 1, 2, Market 1, 2
Market 1 – Cable TV Service Market
- Monopolized by Firm 1
Market 2 – Broadband Internet Service Market
- Classical Hotelling Location Model (competition of firm 1, 2)
- Incumbent (firm 2) versus Entrant (firm 1)
- Incumbent owning bottleneck facilities for broadband Internet service provision
- Entrant paying access charge for using incumbent’s facilities
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The Model – variables definition
Cable TV Market
Normalization of consumer population to 1
Two groups of consumers- Consumers with willingness to pay of VH - Consumers with willingness to pay of VL
CM1 : unit cost of Cable TV service
Assumption: -> firm 1 will set its price at VH
Broadband Internet Service Market
Heterogeneous preference for service- [0,1] ~ uniformly distributed in [0,1]
Firm 1 is located at 0 and firm2 at 1 Firm 2 is regulated on its access price level
Firm 2 is an incumbent and possesses first-mover advantage
1 1
1( ) ( )
2 H M L Mv c v c
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The Model – variables definition
Variables definition
: Standal alone value (fixed value) of broadband Internet service
: General costs for broadband Internet service provision
: transportation cost : Incumbent advantage parameter : Prices of firm 1 and 2 : Access charge per unit demand : firm 2’s cost of managing and repairing its bottleneck facilities
Consumer’ net utility located at
- is a parameter representing for the incumbent’s advantage
1 2 1MU v tx p
2Mv
t
1 , 2p pa
2Mc
c
2 2 2(1 )MU v t x t p
[0,1]x
0,1
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Analysis
1 2 22 (1 )Mp p v t
1 2 1 21 2
( ) ( )(1 ) (1 ),
2 2 2 2
p p p pd d
t t
2 1Mv p
2 2Mv t p
2 1Mv p
t
2 2{ (1 ) }Mv t p
t
2 1Mv tx p 2 2(1 )Mv t x t p
* 1 2( )(1 )
2 2
p px
t
0 1
Full Market Coverage
2Mv is sufficiently high that the market is fully covered
No Bundling Case
Bundling Case
Analytic Framework
Incentives for Service Bundling
The Effect on the Incumbent
Profit
Social Welfare Level
Role of Access Charge
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Analysis
When firm 1 does not take bundling strategy
Profit maximization problem of firm 1 and 2
Equilibrium prices and profits
1 1
1 21 1 1 2
( )1 (1 )( ) ( )( )
2 2 2WOB
H M Mp p
p pMax Max v c p c a
t
2 2
1 2 1 22 2 2
( ) ( )(1 ) (1 )( )( ) ( )( )
2 2 2 2WOB
Mp p
p p p pMax Max p c c a c
t t
* *1 2 2 2,
3 3M M
t tp c t a p c t a
*1 1
1 1( )( ) ( )
3 2 6 2WOB
H M
tt v c
*2
1 1( )( ) ( )( )
3 2 6 2 6WOB t
a c t a c
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Analysis
Profit functions
- Firm 1
- Optimal profit function independent of the level of access charge
- Firm 2
- Optimal profit as a increasing linear function of access charge
2*
1 1
{ (3 )} 1( )
18 2WOB
H M
tv c
t
2*
2
(3 )( )
18WOB t
a a c
a
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Analysis
Firm 1’s broadband Internet demand having high reservation value in cable TV
market
L
VL Type Consumers
2 1( )WBM Lv p v
2 2WB
Mv t p
2 1( )WBM Lv tx p v
2 2(1 ) WBMv t x t p
0 1
1 2(( ) )1 (1 ){ }
2 2 2
WB WBH
H
p v p
t
1 2(( ) )1 1 (1 ){ }
2 2 2 2
WB WBH
H
p v p
t
1 2(( ) )1 (1 ){ }
2 2 2
WB WBL
L
p v p
t
1 2(( ) )1 1 (1 ){ }
2 2 2 2
WB WBL
L
p v p
t
2 1( )WBM Hv p v 2 2
WBMv t p
2 1( )WBM Hv tx p v
2 2(1 ) WBMv t x t p
VH Type Consumers
H0 1
Firm 2’s broadband Internet demand having high reservation value in cable TV
market
Firm 1’s broadband Internet demand having low reservation value in cable TV
market
Firm 2’s broadband Internet demand having low reservation value in cable TV
market
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Analysis
When firm1 takes bundling strategy
Profit maximization problem of firm 1 and 2
- Firm 1
- Firm 2
1 1
1 2
1 1 1 2
1 1 2
(( ( )) )(1 ) 2( ){ }2 2
( ) (( ) )(1 ){ }
2 2 2
WB WB
WB WBH L
WB WBM M
p p
WB WBH M H
v vp p
Max Max p c c at
v c p v p
t
2 2
1 2
2 2 2
1 2
( )(( ) )(1 ) 2( ){ }
2 2( )
(( ) )(1 ) 2( ){ }2 2
WB WB
WB WBH L
WB WBM
p p
WB WBH L
v vp p
Max Max p c ct
v vp p
a ct
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Analysis
Equilibrium prices and profits
* 1 11 1 2
( ) ( )
3 2 6WB H M L M
M M
v c v ctp c c t a
* 1 1 11
1 1 1
3( ) ( ) ( )1{ }{ }
3 6 2 6 12( ) ( ) ( )1
{ }2 2 6 6 4
WB H M L M L M
H M L M H M
v c v c v ctt
tv c v c v c
t t
* 1 12
1
( ) ( )1{ }{ }
3 6 2 6 12( )1
( ){ }2 6 12
WB L M L M
L M
v c v cta c t
tv c
a ct
* 12 2
( )
3 6WB L M
M
v ctp c t a
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Analysis
Profit functions
- Firm 1
- Optimal profit function independent of the level of access charge
- Firm 2
- Optimal profit as a increasing linear function of access charge
* 1 1 11
1 1 1
3( ) ( ) ( )1{ }{ }
3 6 2 6 12( ) ( ) ( )1
{ }2 2 6 6 4
WB H M L M L M
H M L M H M
v c v c v ctt
tv c v c v c
t t
2* 1
2 1
( )(3 )( ) {4 (3 ) ( )}
18 72WB L M
L M
v cta a c t v c
t
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Analysis
Incentive for service bundling and its effect on the incumbent
Incentive for service bundling
- A higher service differentiation leads to a higher incentive for service bundling by firm 1- Incentives for service bundling is not affected by the level of access charge
Its effect on the incumbent
- Incumbent’s profit and market share is reduced by the entrant’s bundling strategy
* *1 1 0WB WOB
2 21 1 1 1
11
[9( ) 9( )( ) ( ) ](3 ) ( )
4( )H M H M L M L M
L M
v c v c v c v ct
v c
* * 12 2 1
( )( ) ( ) [4 (3 ) ( )] 0
72WB WOB L M
L M
v ca a t v c
t
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Analysis
t
Region C: With Bundling
Region B: Without Bundling
The region D where fu ll coverage is not satisfied
The region A where non-negative condition is not satisfied
Region A
Region D
0
1
Figure 1
The entrant’s incentives for service bundling
1(3 )t
12 2 1
( )(3 ) 2( ) ( )
2H M
M M L Mv c
t v c v c
11
3( )(3 ) 2( )
2H M
L M
v ct v c
t
Region C: With Bundling
Region B: Without Bundling
The region D where fu ll coverage is not satisfied
The region A where non-negative condition is not satisfied
Region A
Region D
0
1
Figure 1
The entrant’s incentives for service bundling
1(3 )t
12 2 1
( )(3 ) 2( ) ( )
2H M
M M L Mv c
t v c v c
11
3( )(3 ) 2( )
2H M
L M
v ct v c
*2 ( )WB a
*2 ( )WOB a
1la
Figure 2
Given a fixed access charge, the change of incumbent’s
profit by the strategic choice of the entrant
*2 ( )WB a
*2 ( )WOB a
1la
Figure 2
Given a fixed access charge, the change of incumbent’s
profit by the strategic choice of the entrant
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Analysis
Social Welfare Analysis
When firm 1 doesn’t take bundling strategy
- Total Consumer Surplus:
- Social Welfare
When firm 1 takes bundling strategy
- Total Consumer Surplus:
- Social Welfare
1 2 1 2( ) ( ) ( )WOB WOB WOB WOB WOB constant with respect tW CS a CS a a o a
1 2 ,WOB WOB WOB WOBCS CS a constant with respect to a
1 2 ,WB WB WB WBCS CS a constant with respect to a
1 2 1 2( ) ( ) ( )WB WB WB WB WB constant with respect toW CS a CS a aa
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Analysis
The amount of decreasing in total consumer surplus as the increase of access charge
= the amount of increasing in incumbent profit as the increase of access charge
Total social welfare is constant with respect to the level of access charge
The role of access charge
- The redistribution of the total surplus between consumers and incumbent
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Conclusion - results
Results
Incentive for Service Bundling and its effect on the incumbent
Incentive for Service Bundling
Incentives for service bundling independent of the level of access charge
The higher differentiation, the higher incentives for service bundling
Its effect on the incumbent
The decrease of incumbent’s profit
Social Welfare Analysis
Total Surplus and Access Charge
Total consumer surplus as a linear decreasing function of the level of access charge
Incumbent profit as a linear increasing function of the level of access charge
Total surplus being independent of access charge
Role of access charge
The redistribution of the total surplus between consumers and incumbent
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Conclusion – limitation and further study
Investment on infrastructure and equipment by players with essential facilities Cross-entrance and interconnection issues
Access price determination and socially optimal access charge- Number of existing customer, network externality, degree of service differentiation, incumbent’s first-mov
er advantages
Integration of wireless and wireline markets, convergence between telecommunications and broadcasting industries
Price and access charge regulations
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Appendix
2 2 0 2 2
(3 )0 ( ) ( ) , (3 ) 2( )
2M M M M
ta v c l t v c
Full Market Coverage Case
Without Bundling
Full Market Coverage Constraint
Non-negative market share constraint
WithBundling
12 2 1 1
12 2 1
( )(3 ) 10 ( ) { ( )} ( ),
2 2 2( )
(3 ) 2( ) ( ( ))2
H MM M L M
H MM M L M
v cta v c v c l
v ct v c v c
11
3( )(3 ) 2( )
2H M
L M
v ct v c
Always satisfied
Full Market Coverage Constraint
Non-negative market share constraint
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