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STRUCTURAL SEPARATION
IN THE BROADBAND MARKET
AND TRANSACTION COSTS
itself might be shaped by regulation. Although
both conduct regulation and structural separation
were imposed on incumbents because they own
bottleneck facilities, the facilities stay regulated
as bottleneck even when the facilities that were
considered bottleneck have become duplicable.
Differently from other industries in which vertical
integration was discussed, the telecommunications
industry is characterised by dynamic technological
changes. POTS is built on comparatively mature
and stable technologies and the discussions on
structural separation used to be comparatively
simple
14
. Contrary to POTS, broadband is going
through rapid technological changes and vari-
ous access technologies including ADSL, cable
modem, FTTx, Wi-Fi, WiMAX, and LTE (Long
Term Evolution) of cellular services are utilised.
If we add structural separation to conduct regu-
lation on FTTx like Japan, the development of
a burgeoning facilities based competition in the
broadband market will be retarded and FTTx will
continue to stay as a bottleneck facility. Cave,
further indicates that functional separation by
having set up Openreach in the U.K. is delaying
the take up of FTTx.
Second, long-term large scale investment is
required for bottleneck facilities in broadband.
The quality of service of ADSL depends on the
quality of copper cables and it has some limita-
tions as follows.
Structural separation has been discussed by many
scholars from the view point of industrial organisa-
tion or competition law
12
. One of the characteristics
of recent developments is the balancing analysis
between costs and benefits of vertical integration.
As stated in the above sections, it is important to
take into account coordination problems and trans-
action costs in the broadband market where new
technologies such as FTTx are newly introduced.
There are many papers that have discussed the
balancing analysis. I would elaborate on the topic
by combining Cave's discussions (Cave (2008))
that evaluated structural separation in relation to
NGN with transaction economics
13
.
Cave's discussion is summarised under the
following five points.
a) While regulation properly responds to in-
dustry structure it also shapes it.
b) Even the bottleneck parts of the network
are characterised by periodic substantial
re-investments.
c) Incentives should be put in place to ensure
investment and innovation.
d) Separation creates challenges in the coor-
dination of both operation and investment
decisions.
e) Non-price discrimination can often be solved
by behavioural remedies.
a) Unstable transmission quality
b) Limited geographical availability
c) Slow up-link speed
The first point means, as discussed earlier in
this chapter, that regulation defines the market
structure. Early studies by the Harvard scholars
on industrial organisation relied on the structure,
conduct and performance paradigm (Bain (1959)).
The rationales for regulation in the telecommuni-
cations industry have been discussed based on a
market structure in which incumbents had market
power in the upstream market. However, it is
important to recognise that the market structure
FTTx is superior to ADSL as a fixed access
technology to broadband
15
. However, FTTx is
built on new facilities that require huge invest-
ment. This relates to Cave's third point about
investment incentives.
Huge investment and investment incentives
are closely linked to the fourth point about coor-
dination problems between wholesale and retail
businesses. The coordination problems arise when
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