Under an open access policy, incumbent broadband providers in all EU countries are required to let new market entrants access their networks through bitstream or local loop unbundling (LLU). This type of regulatory provision aims to increase competition among all broadband providers, and is strongly recommended in markets where the prohibitively high cost of setting up a distribution network means that market power is concentrated in the hands of a few players - or even one single player (such as in the case of telecommunications).
In a paper that was recently published in the Journal of the European Economic Association (Unbundling the incumbent: Evidence from the UK Broadband), BCCP fellow Mattia Nardotto with his coauthors Tommaso Valletti and Frank Verboven used data from the UK to investigate whether an open access policy stimulated market entry and broadband penetration and/or lead to an increase in broadband quality.
Mattia says "The study shows that there has been a lot of entry into the UK broadband market. Many companies decided to invest in LLU. We have found that there is no large effect on internet penetration when you compare LLU with bitstream or with competition from another technology. The reason is that new entrants can manage the connection: they can invest in their own technology more than they can with bitstream and provide higher quality than the incumbent. But because they enter the market from the top quality level, we do not observe a large market expansion. What we see is a major improvement in quality. These entrants are very efficient. They know how to provide good quality. In fact, the best of them can match the speed of a cable operator, which is a very good service."
Why is this relevant for consumers. Mattia stressed "In my opinion, all consumers benefit from open access policy, because these new operators provide different combinations of speed and prices in the broadband market. Previously, we had a very basic service provided by the incumbent and a good quality provided by the cable, but there was nothing in-between. Due to the increased competition provided by the new entries, neither cable nor the incumbent can exploit their market power, and all consumers who would like to have a kind of intermediate speed at a good price are able to find the best combination.
In general, I would not say that LLU is the best trade-off. Clearly, the speed that can be achieved with fiber to the home (FTTH) is way better than any copper technology. If the goal was to have competition in the short and medium terms and a lot of people connected at a very good speed, LLU was a good solution. The companies that previously used bitstream were able to improve their internet speeds with LLU. But there are different opinions on that, because it is also true that these companies didn't invest in FTTH because they made a decision for LLU. But in the medium run, it paid off."
Read the full paper (paywalled journal website), the DIW Economic Bulletin article, and the six questions to Mattia Nardotto.