Edited by Anastassios Gentzoglanis and Anders Henten
Chapter 10: Diffusion of Broadband Internet and Structural Separation
Arata Kamino and Hidenori Fuke INTRODUCTION 10.1 One of the most frequently discussed topics in industrial organization theory is vertical integration. However, the competitive effects of vertical integration are two-sided. When a vertically integrated firm with market power in the upstream market is also active in the downstream market, concerns regarding competition give rise to fears that the firm might abuse its market power. Abuse might take the form of obstructing competitors with a refusal to deal or by raising rivals’ costs. To prevent this kind of abuse by the vertically integrated firm, both conduct regulation and structural separation are brought into consideration. When conduct regulation is deemed insufficient to solve the problems, structural separation is viewed as an alternative option. However, structural separation sacrifices economic efficiency such as economies of scale and scope. In recent studies other inefficiencies inherent in vertical separation such as ‘coordination’ between separated firms and ‘hold-up’ problems are pointed out. In the case of the telecommunications industry, which is characterized by dynamic technological changes, structural separation might risk rapid transition to new technologies and preserve the market structure already shaped by regulation. Structural separation assumes the market power of a vertically integrated firm in the upstream market. However, the scope of market power is likely to change with the introduction of new technologies. Market structure is also bound to undergo change and it becomes difficult to define the scope of activities which exhibit bottleneck characteristics. This is especially true in the current telecommunications industry that...
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