Mandating Wholesale Provisions with the Retail-minus Regulation in Mobile Telecommunications

We examine a situation where asymmetric MNOs (Mobile Network Operators) are competing a la Cournot and a potential MVNO (Mobile Virtual Network Operator) is attempting to enter the market by purchasing a wholesale service from one of MNOs. We present two scenarios: (1) if the MVNO can choose the wholesale service provider first and a bargaining game is used to determine the wholesale price, the most efficient (largest) MNO is chosen as the wholesale provider; or (2) if the MNOs play an auction game to determine the wholesale provider and the wholesale price at the same time, the outcome depends on the MNOs’ cost difference. Regarding the cost difference, (a) if the MNOs’ cost difference is large, the most efficient MNO will become the wholesale provider, and (b) if the cost difference is small, any MNO can become the wholesale provider. In any case, the wholesale price is determined at each provider’s monopoly level and does not fall to the marginal cost level. Furthermore, we show that if the MVNO’s efficiency level is low and/or the MNOs have been colluding to restrict outputs, the MNOs have an incentive to (collectively or individually) refuse to provide wholesale service. This situation calls for a policy of mandating wholesale provisions. Additionally, we show that the retail-minus regulation - the simple form of the ECPR (Efficient Component Pricing Rule) - is more favorable to MNOs compared with the complicated ECPR form and that the retail price is lower under the complicated ECPR form.