Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks

A nice paper which shows some contrarian experience. Japan actually tried to diffuse a natural monopoly but it only became bigger. This was in the case of fiber optics and the firm was NTT. It only became larger as other players quit the space:

Can regulation solve problems arising from a natural monopoly? This paper analyzes whether “unbundling,” referring to regulations that enforce sharing of natural monopolistic infrastructure, prevents entrants from building new infrastructure. It models and estimates a dynamic entry game to evaluate the effects of regulation, using a dataset for construction of fiber-optic networks in Japan. The counterfactual exercise shows that forced unbundling regulation leads to a 24% decrease in the incidence of new infrastructure builders. This suggests, therefore, that when a new technology is being diffused, regulation to remove a natural monopoly conversely involves risks that regulated monopolists’ shares will increase.

More specifically:

Thus, by assessing the Japanese data, we can throw light on the general question of how unbundling affects new infrastructure construction and assess the policy changes in the U.S. and other countries. From 2005 to 2009, the Japanese government continued to enforce unbundling regulations on new fiber-optic lines during an important period of fiber-optic network construction. In the process, cable television and electric companies, competitors of the regulated firms, reduced or stopped building fiber-optic lines. They claimed that the unbundling regulations on incumbents decreased other firms’ incentives to build their own lines. Even though they were not regulated to lend their lines to other companies,these firms were concerned because they would have to reduce their price to compete with regulated companies and firms using the unbundled lines. Compared with this, regulated companies increased their shares because they must lend unbundled lines to all other firms wanting to borrow them.

7 As a result, in Japan, regulated firms have dominated the infrastructure markets with the increase of unbundling usage, and regulators failed to encourage competition in the building of fiber-optic networks. 8 The regulation to remove the “natural monopoly” ironically has strengthened a monopoly in infrastructure provision markets in Japan. Figure 1 shows that the regulated firms’ (called NTT) share expanded with an increase of unbundling usage.

It also has nice discussion on infrastructure economics and regulation.

Competition in the telecommunication industry has historically been highly regulated. Governments around the world have adopted “unbundling” regulations to accelerate competition among carriers. This regulation requires that telephone companies that have a monopoly on local lines share them with other companies at a regulated price. 2 Local telephone lines are characterized as a “natural monopoly”; it is not feasible for new entrants to build and maintain the lines due to huge sunk costs. Absent regulation, there would be little competition in the industry and the incumbent could charge monopolistic prices. Hence, governments regulate carriers with this infrastructure in place to allow other firms to use their equipment, so that firms with no infrastructure can more easily enter the markets, ensuring that consumers have access to a wide variety of high quality services at a competitive price.

There is some nice discussion on literature on the issue as well..

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2 Responses to “Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks”

  1. Erik Garcés: “Oligopolies and monopolies are the death of liberty” | THE JEENYUS CORNER « The Jeenyus Corner Says:

    […] Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks (mostlyeconomics.wordpress.com) […]

  2. Arturo Baruffi Says:

    Great website you have here but I was wanting to know if you knew of any community forums that cover the same topics talked about in this article? I’d really like to be a part of community where I can get suggestions from other experienced individuals that share the same interest. If you have any suggestions, please let me know. Appreciate it!

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