Suppose that the numbers in the table below shows the cost structure of a vertically integrated telecom incumbent, which is subject to price regulation at the consumer level, as well as the industry demand. Suppose that retail services produced by potential entrants are perfect substitutes for the incumbent's retail services (i.e., a displacement ratio of 1) and that the (numerous) entrants have no market power.
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Urban
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Rural
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# of subscr.
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20
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10
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M's cost/subscr.
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50
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200
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- of which retail
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20
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20
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- of which net
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30
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180
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M's price/subscr
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100
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100
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a) Suppose cost-based access regulation. Which access price or prices will give the appropriate incentives for downstream entry? Describe!
b) How will your proposed answer in a) affect the incentives for upstream entry? Describe!
c) Suppose instead Efficient Component Pricing (ECP) regulation (maintaining all the over assumptions, except for the cost-based access regulation). What access prices will this regulatory regime result in? How will the incentives change for the incumbent and the potential entrants in the upstream and downstream segments?