The authors looked at competition in markets where firms are vertically integrated

 

 

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How do you get competitive markets when firms that sell an end product control the means of production?

Oligopolistic markets

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 telecommunications industry  in mind when we began this workaround 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.

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. “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.

Understanding the persitence of oligopolies

The research 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. 

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