Access regulation and the entrant's mode of entry under multi-product competition in telecoms

We study the optimal access regulation during the transition from copper to fiber access networks in telecoms when each competitor provides broadband services that are both horizontally and vertically differentiated. We consider a setting in which there is a vertically integrated incumbent that controls a network required for the supply of the final services and an entrant that undertakes a “build-or-buy” decision. In this multi-product framework, where the quality of the services is endogenously determined, we show that the entrant always prefers service-based to facilities-based entry, provided that this option is available. Hence, the regulator sets the welfare-maximizing access charges whenever this socially optimal access pricing policy leads to higher welfare than facilities-based entry. Otherwise, a sufficient access policy that ensures facilities-based competition is to ban access to the incumbent's upstream facilities. We present the conditions under which each of these instruments should be implemented and conclude that the optimal access rules depend on the characterization of consumers according to their tendency to be “firm-oriented” or “technology-oriented” since this discrimination determines whether intra-firm or, respectively, inter-firm competition prevails in the market.