Vertical foreclosure in telecommunications through access prices and interconnection quality

Abstract

It is common sense within the economic regulation literature, that for a vertically integrated company, from the telecommunications sector, which owns local and long distance networks, have incentives to foreclosing other competitors. This occurred in the US telecommunications market, given the dependence of the new long distance competitors (MCI and Sprint) on the AT&T local networks to connect end users. Aiming to avoid these problems, the telecom reform in Brazil followed the US antitrust experience in the AT&T divestiture of 1984, reducing the previous verticalization of TELEBRAS before privatization. We present two models addressing the idea of vertical foreclosure through access pricing and deterioration of interconnection quality. These models show that the regulation of the quality of interconnection can be more important than access pricing. In Brazil, this justifies not only the vertical break-up of TELEBRAS, but also the strong provisions towards the maintenance of quality and a low cost of interconnection.