Mergers in emerging markets with network externalities: The case of telecoms

This paper develops a unifying framework to understand competition issues in networkindustries. It focuses on the telecom(munication) industry and takes two specific effectsof this industry into account. First, the telecom industry is in continuous evolution andalliances affect not only the current market power of the firms but also the evolution ofthe industry. Second, the production of services in the industry is evolving towards theprovision of integrated services in a “system” that benefits from strong networkexternalities. The analysis suggests that the antitrust authorities should capture as well such effects as the magnitude of the installed bases, the compatibility of the alliance’s system with other systems, the switching costs for customers and application writers,and the credibility of the alliance to offer the service. The developed frameworkbuilds on the existing models of networks and combines the different network effects. The relevance of the framework is shown for two important merger cases (WorldCom-MCI and MSG cases), involving respectively an existing market and an emerging one.

Le nouveau modèle européen, volume 2. Paul Magnette and Eric Remacle, editors, Editions de l’Université libre de Bruxelles