Introduction

This chapter presents a concise model of facilities-based competition for fixed telephony between two operators. The model has been made as simple as possible. The purposes of presenting such a model here are:

• to provide a framework for more detailed, realistic and case-specific analysis (an investigation of a rather simple, stylized model will make it easier to understand the models presented in later chapters);

• to make the reader familiar with the type of assumptions needed to get meaningful results;

• to introduce and explain important economic indicators (in particular profits, consumers surplus, and welfare);

• to explain the notion of an equilibrium;

• to develop a basic understanding of strategic interaction among operators and causal effects of parameter changes.

Although the static model itself provides several interesting insights, it is too stylized to address more specific policy issues. To make the analysis more realistic, some assumptions will be dropped later, and extensions will be made in different directions. This will be done in later chapters, for instance by incorporating entrants that offer services through carrier select or lease the incumbent's unbundled local loop, by distinguishing different types of customers (e.g. residential and corporate customers), and by allowing for alternative forms of price competition (e.g. termination-based price discrimination).

Section 3.2 presents the static model. In Section 3.3, some preliminary and basic results are derived and interpreted. Section 3.4 contains a description of the simulation methods and the standard parameter configuration.