Effects of Spectrum Holdings on Equilibrium in the Wireless Industry

Abstract

We propose a model of Bertrand competition in which consumers choose firms based on prices and qualities. Service quality depends on congestion, which is a function of capacity and output. We first present theoretical properties of the model. Next, we calibrate the model to the wireless industry and use it to evaluate the impacts of changes in spectrum allocation on consumer welfare and profits. Simulations of the model show that when one firm acquires more spectrum, consumer welfare at all firms increases due to congestion externality effects. We find that a transfer of spectrum from one firm to another can either raise or lower consumer welfare at the firms not involved in the transaction, again due to externality effects. Where it is possible to compare the results of our model to the wireless industry, they are consistent with the data. We also explore some possible effects of the upcoming 2016 spectrum auctions.

Promoting downstream competition

“…2 There are limited theoretical and empirical analyses of the relationship between spectrum concentration and consumer welfare. The model of oligopoly competition by Loertscher and Marx (2014) considers the implications of spectrum holdings for reducing network costs, and the model by Lhost, Pinto, and Sibley (2015) for capacity and network quality. The empirical results of Woroch (2020), using data from 700 areas in the USA, show an inverted-U relationship between spectrum concentration and subscriber penetration rates.…”

Spectrum Concentration and Performance of the U.S. Wireless Industry

“…6 calibrating their model to nationwide industry data, they confirm this pattern by simulating a complex spectrum transfer that occurred in 2012. 8 Lhost et al (2015) also analyze a model in which mobile operators set prices for qualitydifferentiated services. However, in contrast to Loertscher and Marx (2014)-in which a carrier's quality is predetermined-service quality in Lhost et al (2015) is directly related to the relative amounts of spectrum that are held by a carrier and its rivals: the more spectrum a carrier holds, the lower the traffic congestion on its network, and so the higher relative demand for its service by consumers.…”

“…8 Lhost et al (2015) also analyze a model in which mobile operators set prices for qualitydifferentiated services. However, in contrast to Loertscher and Marx (2014)-in which a carrier's quality is predetermined-service quality in Lhost et al (2015) is directly related to the relative amounts of spectrum that are held by a carrier and its rivals: the more spectrum a carrier holds, the lower the traffic congestion on its network, and so the higher relative demand for its service by consumers. After calibrating their model to industry data, they simulate the effects of spectrum transfers, and find that an increase in spectrum concentration when a small carrier transfers some spectrum to a large one could lead to lower quality-adjusted prices that are charged by every carrier.…”

Mobile Investment and Traffic Per Capita Tend to Increase with License Duration

“…Loertscher & Marx (2014) found that a transfer of spectrum from a low-quality or inefficient operator toward a high-quality or a more efficient one increases consumer surplus. Lhost et al (2015), considering the lack of spectrum as a capacity constraint showed that a spectrum allocation where the more efficient operators do not hold more spectrum than least efficient ones was unsuitable and could hamper competition and increase prices. To find out more about spectrum concentration and its impact on the performance of wireless industry, see Woroch (2018).…”