Co-Investments and Tacit Collusion in Regulated Network Industries: Experimental Evidence
-
Jan Krämer
and
Ingo Vogelsang
Abstract
Several regulatory authorities have recently allowed competing network operators to co-invest in network infrastructure. With the use of a laboratory experiment, we investigate the impact of co-investments on competition in regulated network industries, particularly in comparison to unilateral and duplicate investments. Our main finding is that co-investment (i.e. cooperation at the infrastructure level) facilitates tacit collusion (i.e. cooperation at the retail level) significantly, which questions the positive evaluation of co-investments with respect to consumers’ surplus in the theoretical literature.
Acknowledgments
We would like to thank Niklas Horstmann for indispensable research assistance as well as two insightful referees and Marc Bourreau, Carlo Cambini, Steffen Hoernig and participants of the European Conference of the International Telecommunications Society (ITS), the Conference of the German Association of Experimental Economics (GfEW) and the Conference of the European Association of Research in Industrial Economics (EARIE) for valuable comments. Financial support from Deutsche Forschungsgemeinschaft (DFG) through GRK 895 is gratefully acknowledged.
Appendix
A Proofs for the Equilibria of the Network Competition Game
In the following, we investigate the equilibrium outcome of the above model with respect to firms’ (i) coverage and (ii) prices under the three different regulatory scenarios.
Retail equilibrium. First, consider the strategic interaction in the retail phase, given the firms’ decisions from the investment phase. In fact, because the firms’ investments in network infrastructure are sunk, these costs are relevant only insofar in the retail phase as they determine the access charge that firms have to pay each other. The access charge, however, may lead to positive marginal costs for the access seeker. A firm’s average marginal costs are important for the price level in the retail phase because they determine a lower bound on prices. More formally, it can be shown that (7) constitutes the unique price equilibrium (neglecting increments), because no firm wants to unilaterally deviate from this price:
No firm would like to raise its price above
It is easy to see that
No firm wants to lower its price below
It follows that
Moreover, as the stage game otherwise parallels a standard Bertrand game, it is easy to see that this Nash equilibrium must be unique. Furthermore, Farrell and Maskin (1989) show that
Investment equilibrium. For the derivation of the investment equilibrium, we refer to the working paper version of this article (Krämer and Vogelsang 2016). However, we wish to highlight here that neither duplication nor co-investment is an equilibrium outcome when equilibrium prices are expected. This is consistent with other, more complex models on this issue (see Bourreau et al. 2013). Although the co-investing firms can save some infrastructure investment costs, the resulting competition on the common infrastructure will usually drive retail profits down to an even larger extent. For example, in a co-investment duopoly each firm will have to bear more than 50% of the investment cost of a monopoly firm due to some individual fixed costs, wheras each firm receives less than 50% of the monopoly profit due to the emergence of competition. Thus, co-investment does not emerge in equilibrium unless there exist some additional effects, which we do not model here, like an additional demand expansion effect due to co-investment or an actual cost reduction effect, e.g. due to lower financing costs (Bourreau et al. 2013).
B Panel Analysis of Tacit Collusion
In addition to the OLS regression reported in Table 5, we also consider the following three-level mixed effects model, which accepts measurements at the level of a single retail period (t), and thus allows us to analyze tacit collusion not only across rounds, but also across periods within rounds:
Here, pricetds denotes the (deviation of the) price (from the equilibrium price or average costs) in period t for duopoly d in the independent subgroup s. ζs and βs are random effects that are common to observations from the same subgroup s. ζds as well as βds are random effects common to the measurements from the same duopoly d, nested in subgroup s.
Multilevel Mixed-Effect Panel Regressions on Tacit Collusion.
| (1) ΔEQ | (2) ΔAC | (3) Market price | (4) Own price | |
|---|---|---|---|---|
| Duplication (10K HH) | 1.534** | −1.681*** | −0.119 | −1.605*** |
| (0.467) | (0.472) | (0.472) | (0.407) | |
| Co-investment (10K HH) | 3.652*** | 1.744*** | 1.443*** | −0.350 |
| (0.333) | (0.338) | (0.431) | (0.326) | |
| Coverage (10K HH) | 2.237*** | 2.100*** | 0.975* | 0.0749 |
| (0.442) | (0.446) | (0.425) | (0.402) | |
| Communication | 1.010 | −0.174 | 1.835 | 1.706 |
| (1.884) | (1.943) | (1.953) | (2.212) | |
| Round | 2.504*** | 2.155** | 1.964*** | 1.233* |
| (0.649) | (0.677) | (0.585) | (0.586) | |
| Period | −0.532* | −0.822*** | −0.532* | −0.822*** |
| (0.250) | (0.245) | (0.250) | (0.245) | |
| Period×time | −0.0335 | 0.0380 | −0.0335 | 0.0380 |
| (0.0911) | (0.0893) | (0.0911) | (0.0893) | |
| Equilibrium price | 0.516*** | |||
| (0.0688) | ||||
| Average costs | 0.176*** | |||
| (0.0429) | ||||
| Constant | −9.243** | −2.507 | 12.43** | 32.36*** |
| (3.262) | (3.339) | (4.263) | (3.534) | |
| Observations | 1400 | 2800 | 1400 | 2800 |
| Log lik. | −4539.6 | −9626.2 | −4519.6 | −9458.1 |
Standard errors in parentheses. +p<0.10, *p<0.05, **p<0.01, ***p<0.001.
The regression confirms the results of the OLS regression in Table 5 and additionally shows that tacit collusion decreases over the periods in a given round. However, there is no significant interaction effect between periods and rounds.
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