Strategic Interaction under Asymmetric Regulation

Abstract

Regulation binds incumbent firms to a different set of obligations from their entrant-competitors, thereby creating an asymmetric set of options from which the firms may select the strategies under which they will interact. Whilst most regulatory obligations are specified in law, some take the form of contractual agreements. New Zealand’s ‘Kiwi Share’ obligations bind the telecommunications market incumbent to a set of retail tariff structures and levels that have both restricted its choices and opened up a range of new strategic opportunities for its rivals that have had a significant effect upon the development of the New Zealand industry. This paper examines the specific consequences of the asymmetric tariff obligations and ensuing strategic interaction amongst sector participants on sector development – namely the effect of universal service retail prices and the allocation of the ensuing costs in determining the ongoing regulatory agenda; the role of a ‘free local calling’ obligation on the evolution of New Zealand’s broadband market; and the consequent application of further asymmetric legislative obligations on the incumbent to address apparent ‘problems’ for which the asymmetric tariffs and rivals’ strategic choices provide more credible explanations than the incumbent’s exertion of its dominant position.