Authors: Lorenz Nett, Stephan Jay
Summary
The Digital Agenda of the German government intends to achieve a comprehensive coverage of households with high speed broadband internet access. According to the Digital Agenda 2014 – 2017 of the German Government, a nationwide broadband infrastructure with download speed of at least 50 megabit per second (Mbit/s) shall be established with an efficient technology mix. VDSL2 (non-vectored), VDSL (vectored) and FFTH (GPON) are three wireline infrastructures that enable such download speeds. Cable network operators can ensure such download speeds by upgrading their networks to DOCSIS 3.0 which is almost completed by the German cable network operators. Platform competition between a telco-operator using one of the previously mentioned network infrastructures and a cable network operator will occur in regions in which a cable network is already rolled out in Germany.
More specific we will analyse a two-stage Hotelling model. The Hotelling model is a prominent game theoretic approach to model a duopoly. In the first round the telco-operator determines its network infrastructure. A telco-operator faces three options: VDSL2 (non-vectored), VDSL2 (vectored) or FTTH (GPON). By choosing the technology fixed costs and variable costs per broadband connection result. It is assumed that cable network operators have already upgraded their networks to DOCSIS 3.0. Thus, cable network operators have already determined their network infrastructure technology and the corresponding fixed and variable costs. In the second stage price competition between both platforms happens. Depending on the willingness-to-pay structure for various kinds of broadband connections, the number of patrons and the intensity of competition Nash-equilibrium prices result. These prices determine the market share and the profit of each company (platform).
In our analysis we consider 12 different clusters which are representative for Germany. Each cluster reflects a region with similar geographic characteristics like subscriber density. For each of these 12 clusters fixed costs and variable costs per connection have been derived. The calculation is based on an analytical NGA-cost-model developed by the WIK. All equilibrium calculations refer to these cost parameters. Equilibrium prices are identified separately for each of these 12 clusters. Various scenario calculations have been conducted by modifying the parameters in respect to the demand parameters (for example (e.g.) willingness-to-pay for a specific kind of broadband access connection, the number of patrons etc.). The characteristics of the final solution, i.e. the sub-game perfect equilibrium, provide answers to the following questions: Which kind of telco-network infrastructure (VDSL2 (non-vectored), VDSL2 (vectored) or FTTH (GPON) generates the highest profit in the competition with a cable network operator? Is it possible that two platforms generate positive profits in a specific region? What is the pricing structure and what are the market shares between both platforms which provide wireline access to electronic communication services?
Discussion Paper is available for download.
