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Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks

By  |  November 6, 2012

Posted by D. Daniel Sokol

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    Naoaki Minamihashi (Bank of Canada) addresses Natural Monopoly and Distorted Competition: Evidence from Unbundling Fiber-Optic Networks

    ABSTRACT: Can regulation solve problems arising from a natural monopoly? This paper analyzes whether “unbundling,” referring to regulations that enforce sharing of natural monopolistic infrastructure, prevents entrants from building new infrastructure. It models and estimates a dynamic entry game to evaluate the effects of regulation, using a dataset for construction of fiber-optic networks in Japan. The counterfactual exercise shows that forced unbundling regulation leads to a 24% decrease in the incidence of new infrastructure builders. This suggests, therefore, that when a new technology is being diffused, regulation to remove a natural monopoly conversely involves risks that regulated monopolists’ shares will increase.