The Routledge Companion to Network Industries

Matthias Finger, Christian Jaag

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317668077
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In recent decades, network industries around the world have gone through periods of de- and re-regulation. With vast amounts of sometimes conflicting research carried out into specific network industries, the time has come for a critical over-arching assessment of this entire industry in order to provide a platform of understanding to aid future research and practice.

This comprehensive resource provides an orientation for academics, policy makers and managers as to the main economic, regulatory and commercial challenges in the network industries. The book is split into sections covering market, policy, regulation, management perspectives, whilst all of the key network industries are covered, including energy, transport, water and telecommunications.

Overseen by world-class Editors and experts in the field, this inter-disciplinary resource is essential reading for students and researchers in international business, industrial economics and the industries.

1

Introduction

Matthias Finger and Christian Jaag

Network industries have witnessed around 20 years of de- and re-regulation, as well as deep changes in their underlying technologies. It is time for a critical assessment and a look into the future. This book’s ambition is to provide an orientation for academics, policymakers, and managers as to the main economic, regulatory, and commercial challenges – and potential solutions – in nine network industries: telecommunications, postal services, electricity, gas, maritime transport, railways, air transport, urban public transport, and water.

Network industries can be categorized into four domains (see Figure 1.1): communications, transport, energy, and water. While most industries clearly belong to one of these domains, the postal sector is somewhat hybrid in that it provides a means of communication (letter mail), but also transportation (parcel services).

Figure 1.1 Network industries

Source: Authors’ own elaboration

Network industries are interesting from an engineering, economics, and policy perspective for three main reasons:

• First, they share a common layered structure that determines their heterogeneous economic characteristics (see Table 1.1). The passive network-infrastructure layer comprises the physical infrastructure with a high fraction of irreversible fixed cost and strong economies of scale and/or bundling. This results in naturally monopolistic bottlenecks. The second layer (active infrastructure) is part of the infrastructure as well, but investment cycles are shorter and the cost may be reversible. The services layer uses the other layers to provide services to customers. The cost structure is more flexible and competition is easier to implement than in the infrastructure layers. This layered structure necessitates a differentiated (disaggregated) and well-targeted regulatory approach (see Knieps, 2000). A major organizational issue is the unbundling of the three different layers, since an integrated firm may have incentives to bar others from being active in the (potentially competitive) services layer. Hence, access to the infrastructure is an important issue, both commercially and from a regulatory perspective.

• Second, they exhibit network effects, also called network externalities (see Katz and Shapiro, 1985; Farrell and Saloner, 1985). This is the effect that a user of a service has on the value other people derive from that service. As a result, the value of a product or service is dependent on the number of others using it. The telephone is a classic example: the more people who own telephones, the more valuable the telephone is to each owner. The network effect may be present on all three layers of network industries. It creates commercial and regulatory challenges as well.

• Network industries also consist of, and provide platforms with, two- or multi-sided markets. This means that they serve two or several distinct user groups that provide each other with network benefits (Rochet and Tirole, 2006). Multi-sided platforms produce value for all users or parties that are interconnected through it by playing an intermediary role, and therefore those parties may all be considered customers (unlike in the traditional seller–buyer dichotomy). This creates a potential for pricing issues and a strong tendency towards concentration, and therefore motivates regulatory oversight.

In order to capture all these aspects and provide a unified view, the book approaches the network industries from three main perspectives:

• The industry perspective, with a focus on current market developments and dynamics.

• The policy perspective, discussing the rationales and aspects of sector-specific regulation.

• The management perspective, focusing on the strategic challenges resulting from regulatory and technological change.

The three perspectives depend on each other and are strongly interrelated (see Figure 1.1). The industry perspective observes the market outcome and its development over time. It captures the entry and exit of market participants, as well as their behavior and market position. The behavior of the market participants is expressed by their business models, their product range offered, and their pricing strategy. These strongly depend on the legal and regulatory framework that prohibits, enables or incentivizes certain business models and may determine the market structure and the organizational structure of the market participants.

Table 1.1 Layered structure of network industries

	Layer 1: Passive infrastructure	Layer 2: Active infrastructure	Layer 3: Services
Economic characteristics	Mainly irreversible fixed cost Long-term investment cycle	Mixed cost structure Medium-term investment cycle	Mainly reversible cost Short-term investment cycle
Market structure	Naturally monopolistic bottlenecks	Actual and potential competition	Actual and potential competition
Telecommunications	Ducts, cables	Routers, switches	Voice and data services
Postal services	Streets, buildings	Post offices, sorting centers	Letter and parcels conveyance services
Electricity	Transmission and distribution networks	Power plants (nuclear, hydro, coal, oil, gas), pump storage, batteries	Energy services, metering services, balancing services
Gas	Pipelines, liquefied natural gas converting facilities	Refinement	Energy services
Maritime transport	Channels	Harbors, ships	Transportation services, harbor-related services
Railways	Tracks, on-track signaling systems	Train stations, on-train signaling systems, rolling stock	Transportation services
Air transport	Air traffic control infrastructures	Airports	Air transport, airport-related services
Urban public transport	Streets, tracks, tunnels	Rolling stock	Transportation services
Water and wastewater	Water distribution and wastewater pipes	Water and wastewater treatment plants	Water services

Recent developments in the legal framework of the network industries can be structured in terms of regulation, liberalization, and privatization:

• Regulation refers to the entirety of legal constraints on economic activity in the sector. Network industries are characterized by a dense regulatory framework (see Figure 1.1). Economic regulations may be concerned with fair competition, and be symmetrically targeted to all operators in the sector (market regulation). Additionally, regulations may focus on correcting market failures by providing a socially desired level of service quality or redistribution, or fostering environmental protection. This second kind of intervention (provision regulation, such as universal service obligations [USOs]) is often asymmetric and costly, which has long been the main motivation for establishing state monopolies. Such monopolies have necessitated further regulations to deal with market dominance.

In addition to economic regulation, in network industries there are safety regulations (in energy, railways, and air transport), data protection (in telecommunications and postal services) and security of supply and national independence (in energy).

• Liberalization is the abolishment of reserved areas and the opening of markets for new operators. In recent years, most network industries have become liberalized in many countries. In addition, technological change - which is mostly driven by information and communication technologies - is substantial in some of the network industries and often goes in parallel with market dynamics. As a result, sectors have converged, stimulating indirect competition between different industries (for example, postal services and telecommunications).

• Privatization is the process of transferring ownership of a network operator from the public sector (government-owned) to the private sector. The precursor to privatization is corporatization, which transforms government agencies into corporations. Privatization often takes place in parallel with liberalization (or prior to it) in order to ensure a level playing field for all firms in the sector.

In parallel with liberalization and increased competition, sector-specific regulation in the different network industries has become a widely discussed topic among academics, policy makers, industry economists and regulators themselves. The focus of these debates has usually been on whether such regulation is necessary, and, if so, what its optimal design should be. Some argue for deregulation (that is, the abolishment of price regulation or USOs), whereas others propose re-regulation, which involves the replacement of pre-existing (monopoly-related) regulations with new regulations that aim to safeguard service levels and competition. The resulting compromise is often somewhere in between de- and re-regulation. The current and future challenges in network industries mainly pertain to the dynamics in the industries’ regulatory frameworks. Therefore, regulation is one of the main focal areas of this book.

From an economics perspective, the princip...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Contributors
• 1 Introduction
• PART I The market and industry perspective
• PART II The policy and regulatory perspective
• PART III The strategy and management perspective
• Index