IESE Research Papers,
IESE Business School

Abstract: I present a vertical differentiation model to assess the quality-wise strategy of an incumbent telecommunications operator under open access regimes. I show that it is always profitable for an incumbent subject to wholesale regulation to degrade wholesale quality in a non-recoverable fashion. The findings are robust to the number of competitors and the price cap level, unlike those predicted by the cost-raising discrimination paradigm. I also show that functional separation, a structural remedy aimed at separating the incumbent's wholesale and retail operations, better aligns supply-side incentives with those of consumers. The analysis suggests that structural remedies exhibit good properties to implement open access regimes.

Keywords: Broadband Regulation; Open Access; Quality Service; Discrimination

JEL-codes: D42; L12; L15; L22; L42; L96

27 pages, November 11, 2011

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