Competition and Market Strategies in the Swiss Fixed Telephony Market. An estimation of Swisscom’s dynamic residual demand curve.

摘要

Fixed telephony has long been a fundamentally important market for European telecommunications operators. Theliberalisation and the introduction of regulation in the end of the 1990s, however, allowed new entrants to competewith incumbents at the retail level. A rapid price decline and a decline in revenues followed. Increased retailcompetition consequently led a number of national regulators to deregulate this market. In 2013, however, manyEuropean countries (including Switzerland) continued to have partially binding retail price regulation. More than adecade after liberalisation and the introduction of wholesale and retail price regulation, sufficient data is available to empirically measure the success of regulation and assess its continued necessity. This paper develops a marketmodel based on a generalised version of the traditional “dominant firm – competitive fringe” model allowing theincumbent also more competitive conduct than that of a dominant firm. A system of simultaneous equations isdeveloped and direct estimation of the incumbent‟s residual demand function is performed by instrumenting themarket price by incumbent-specific cost shifting variables as well as other variables. Unlike earlier papers thatassess market power in this market, this paper also adjusts the market model to ensure a sufficient level ofcointegration and avoid spurious regression results. This necessitates introducing intertemporal effects. While theincumbent's conduct cannot be directly estimated using this framework, the concrete estimates show that residualdemand is inelastic (long run price elasticity of residual demand of -0.12). Such a level of elasticity is, however, only compatible with a profit maximising incumbent in the case of largely competitive conduct (conduct parameter below0.12 and therefore close to zero). It is therefore found that the Swiss incumbent acted rather competitively in thefixed telephony retail market in the period under review (2004-2012) and that (partial) retail price caps in place can no longer be justified on the basis of a lack of competition.