research@hec - Issue #26 - (Page 2)

industrial economy research hec Two-tier competition Putting an end to oligarchies How do you get competitive markets when firms that sell an end product control the means of production (as is the case with the heavyweights of mobile telephony in France)? For Johan Hombert and his co-authors, the solution cannot be reduced to simply forcing integrated firms to provide the means of production to other isolated firms. Johan Hombert B IOGRAPHY Johan Hombert joined HEC Paris in 2010 after working for INSEE and teaching at ENSAE (National School of Statistics and Economic Administration), from which he is a graduate. He holds a PhD in economics from the Toulouse School of Economics as well as a degree from Ecole Polytechnique. His research focuses on frictions in financial markets, entrepreneurship, and industrial organization. Johan Hombert and his co-authors looked at competition in markets where firms are vertically integrated: that is, they control both the production input — the mobile network they own in the case of mobile telephony — and the final product — the mobile plans they propose to consumers. “We had the telecom industry in mind when we began this work around 2007, when high-speed Internet was developing in France, because many questions about regulation and competition policy were being asked: How do you develop telecoms and ensure that prices are not too high for the end-user?” says Hombert. Back then, and even now, the market was oligopolistic, with a limited number of players. But the same can be said of numerous other industries. put up antennas, etc. So the regulator’s idea was to bring in new firms without asking them to build their own network. It was about forcing existing operators to rent their network to new firms and thereby create competition without investment.” And so MVNOs (Mobile Virtual Network Operators) like Virgin Mobile, Auchan, and Budget were born. ENCOURAGING THE ENTRY OF NEW FIRMS IS NOT ENOUGH The sector that best illustrates this research remains that of mobile telephony in France. Before the arrival of Free in late 2011, there were just three operators that owned network infrastructure and mobile licenses: SFR, Bouygues Telecom, and Orange. “What the regulator wanted to do for several years, and what the European Commission also pushed hard to get, was to have more competitors. But entry in this type of market is very expensive because you have to develop a new network infrastructure, UNDERSTANDING THE PERSISTENCE OF OLIGOPOLIES The work of Hombert and his co-authors shows, however, that this solution does not lead to competition in the true sense. “Existing operators have little incentive to help their competitors produce goods that will compete with theirs,” he says. Vertically integrated firms get their profits from two sources: selling mobile plans to customers, and providing MVNOs with access to part of their network. “There will therefore be permanent tension. On the one hand, they will want to lower prices on plans to capture more market share, but in doing so, they will kill MVNOs and reduce their other source of profit. They can also try to make a lot of profit by renting their network to a maximum number of competitors, but in doing so, they increase competition in market pricing and reduce their profit in that regard. In fact, every time integrated firms want to be more aggressive on one of the two markets, they negatively impact their other source 2 • April-May 2012

Table of Contents for the Digital Edition of research@hec - Issue #26

Cover & Contents
Two-tier competition Putting an end to oligarchies
Kaizen We can see clearly now!
Real estate finance How demographics drive housing prices

research@hec - Issue #26