Abstract

We analyse the operational implications of carrying out local loop unbundling, to identify the structural barriers that delay entry by alternative operators. We claim that this analysis should be used to define appropriate price squeeze tests, to be applied both as ex-post antitrust and ex-ante regulatory tools to prevent market foreclosure by incumbent firms. We apply these tests to the 2002 Reference Offer proposal relative to access to the public telephone network at a fixed location for residential customers in Italy and find that the growth of competition in that market may be prevented. Therefore, we propose a number of measures aimed at pursuing dynamic efficiency, namely, providing incumbents with adequate incentives to share with new entrants both the benefits from scale economies and the costs inherent to developing competition. This appears to be consistent with the spirit of the New Regulatory Framework in Europe, where encouraging facility based competition (wherever possible) is a key policy objective. In this framework, according to the principles of cost orientation and technology neutrality, it is also suitable to assess the pros and cons of the geographical deaveraging of the wholesale price of unbundling, while preserving equity.