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Big Telcos Aren’t Necessarily Better: A Case Study of EU versus US Market Concentration

Author

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  • Bryson, Joanna J.

    (Hertie School)

  • Malikova, Helena
  • Garbe, Lisa
  • Backovsky, David

Abstract

Telecommunications companies (telcos) provide infrastructure essential to the delivery of digital content. The competitiveness of European Union businesses is presently seen as critically dependent on expansion of next-generation communication technologies. Yet, EU telcos are displaying returns on capital that disappoint private investors, leading in some cases to depressed share prices, and potentially making them vulnerable to takeovers bids by financial investors. Given their essential role, the prospect of EU telcos falling into mostly foreign-owned, fiercely profit-maximizing, and/or cost-cutting investors is unappealing for policy makers, at both the national and the European level. One solution suggested by the telcos themselves is that they be allowed to consolidate. Economic theory does not provide a clear answer to how such concentration might affect investment in infrastructure. In this paper, we provide a comparative empirical analysis of the relationship between market concentration and investment in infrastructure in the telco sector. First, we compare investment rates in infrastructure by major telco companies in both the EU and the more concentrated US market. We find more value being returned to customers in the form of infrastructure investment in the less-concentrated EU market. Second, we compare telcos' profitability with that of other corporations involved in the information or ``eye-ball'' value chain. We find operating profits of telcos on both sides of the Atlantic are broadly in line with other companies of the value chain, with the notable exception of the highly concentrated digital ad exchange business. This evidence suggests that lack of incentives rather than lack of ability explains the larger portion of profits invested into infrastructure in the EU compared to the US. Rather than allowing market concentration, which could raise consumer prices and lower infrastructure investment incentives, EU regulators might consider other fund-raising mechanisms, such as redistributing profits from digital ad exchanges.

Suggested Citation

  • Bryson, Joanna J. & Malikova, Helena & Garbe, Lisa & Backovsky, David, 2023. "Big Telcos Aren’t Necessarily Better: A Case Study of EU versus US Market Concentration," SocArXiv m42uh, Center for Open Science.
  • Handle: RePEc:osf:socarx:m42uh
    DOI: 10.31219/osf.io/m42uh
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    References listed on IDEAS

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    1. Matias Covarrubias & Germán Gutiérrez & Thomas Philippon, 2019. "From Good to Bad Concentration? US Industries over the Past 30 Years," NBER Chapters, in: NBER Macroeconomics Annual 2019, volume 34, pages 1-46, National Bureau of Economic Research, Inc.
    2. Jay Pil Choi & Doh†Shin Jeon & Byung†Cheol Kim, 2018. "Net Neutrality, Network Capacity, and Innovation at the Edges," Journal of Industrial Economics, Wiley Blackwell, vol. 66(1), pages 172-204, March.
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