BROWSE
Detail
Journal Article
Market Efficiency Analysis Between Facility-Based and Service-Based Competition
- Authors
- Il Won Seo, Duk Hee Lee, Byung Woon Kim
- Issue Date
- 2008-08
- Citation
- ETRI Journal, v.30, no.4, pp.587-596
- ISSN
- 1225-6463
- Publisher
- 한국전자통신연구원 (ETRI)
- Language
- English
- Type
- Journal Article
- Abstract
- Facility-based competition (FBC) in the telecommunications market is considered to have lower static efficiency in the short term and higher dynamic efficiency in the long term. Under service-based competition (SBC), the entrant can reduce its setup costs by leasing network facilities from the incumbent, which makes the entrant viable, pushes the market price down and promotes static efficiency. This paper attempts to measure static efficiency by comparing the profits of the incumbent and entrant in terms of consumer surplus and social welfare under each competition type by extending the Stackelberg model. The results, assuming a linear demand function and variation in regulatory level, show that FBC results in higher social welfare than SBC on the whole. However, SBC accompanied by strong regulation is also shown to have the potential to be superior over FBC. It is also revealed that FBC exhibits a higher producer surplus (particularly, the incumbent's producer surplus) and is, therefore, more desirable in terms of dynamic efficiency. When the entrant's cost is high in FBC, social welfare is shown to be lowered, implying that cost competitiveness is a necessary condition for social welfare.
- KSP Keywords
- Consumer surplus(CS), Cost competitiveness, Demand function, Dynamic efficiency, Market efficiency, Market price, Necessary conditions, Producer surplus(PS), Regulatory level, Service-based, Set-up cost