Case Studies

Bottom Up Modelling

Telecommunications competition is well established in most countries. But in many of them there is one company, which used to hold the monopoly of fixed line services. It’s usually uneconomic for a new competitor to replicate this network of copper (and, increasingly, fibre) lines to homes and businesses nationwide. So, to promote competition, regulators usually require that the former monopoly player (known as the incumbent) offers wholesale services to its newer competitors. These services often include some form of local loop unbundling, where the newer competitors can rent the incumbent’s copper phone line between the local exchange building and the customer’s premises. The newer competitor then installs its own equipment at the incumbent’s local exchange building at the end of the local loop it is renting, and then connects this local loop to its own core network.

So what is a fair price to rent one of these local loops? If the price is set too high, the newer entrants cannot make sufficient money and competition dies. If the price is set too low, the incumbent has little incentive to invest in its network, or to provide the maintenance on the copper line for its wholesale customer.

One way of solving this is to take the incumbent’s costs (plus an allowance for some profit or return on investment) and apportion them to the services it offers. But this approach has its drawbacks. What if the incumbent is over-staffed or inefficient? What if it using old and expensive technology when it use newer and cheaper technology to do the same job. Is it fair – or indeed good for the economy – to have newer entrants paying for these inefficiencies?

Bottom up modelling is one way of tackling this thorny issue (and understanding the costs of many wholesale services on mobile and fixed telecoms services). In essence, it asks the question “What would it cost for an efficient operator using the most modern appropriate technology to provide this service to this many customers in these places?”

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