Retailing In The European Union: Structures, Competition and Performance
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Conventionally, asymmetric regulation benefits entrants while adversely impacting on incumbents. Furthermore, depending on market position and practical MTR implementation, the effect of asymmetric regulation on an MNO may be beneficial or adverse. With this in mind, the asymmetric regulation indicator for operator i in the entrant group at t is:. The asymmetric regulation indicator for an incumbent represents the adverse effect of asymmetric regulation.
The construction of the asymmetric regulation index for incumbent i at t is:. The value range indicates that asymmetric regulation benefits entrants but harms incumbents. Precisely, the higher an entrant index AR i,t E value, the greater is the entrant benefit, while higher incumbent index or lower AR i,t I absolute values indicate smaller incumbent adverse effects.
Figure 5 illustrates the average values of the asymmetric regulation indexes for entrants and incumbents for through In particular, these data suggest symmetry and convergence to zero between the asymmetric regulatory indicators.
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This effect is due to the adoption of symmetric regulation in some European countries e. Sweden from and the narrower MTR differentials. Also, this trend may reflect regulatory rationales when setting the level of asymmetry with respect to the MTR margins in Europe, as in the case of France.
Source: Quantifica and the European Commission. The estimation results are reported for both MNO groups: Table 1 for incumbents and Table 2 for entrants. Furthermore, the Sargan test of over-identified restrictions shows that the instrumental set is valid. First, the relationship between the firm performance variables both internal and cross effects is analysed.
Second the direct impact of MTR regulation on firm performance is determined. Finally, the indirect impact of MTR regulation due to the endogeneity between the performance indicators is explored. Glide path regulation. Asymmetric regulation. Notes : The standard errors are in brackets. Table 1 indicates that incumbents' profit and market shares are impacted only by own lagged variables, but not other performance variables.
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This result reflects the dynamic growth of European mobile telephony, as operators are likely to accumulate market share and profit, i. Furthermore, Table 1 shows that the own lagged market share coefficient 0. This finding suggests that the incumbent shares are highly predictable from past values and that other exogenous variables have only a minor impact on share values.
This finding does not hold for incumbent profits. In accordance with Figure 3 , which demonstrates the relatively flat relationship for the incumbent group, there is an insignificant relationship between the performance indicators in Table 1. Additionally, the direct consequences of MTR regulation, comprised of glide path and asymmetric regulation variables, on incumbent performance are presented in Table 1.
Moreover, Table 1 also indicates that asymmetric regulation reduces incumbent profit estimated coefficient 0. Another possibility is that European asymmetric regulation induces stronger competitive pricing strategies among MNOs 24 , damaging incumbents' performance. Moreover, as incumbent market shares are relatively stable, European asymmetric regulation is likely to reduce incumbent profit.
Should firms partially control the relationship between market share and profit, these empirical results imply that incumbents must spend greater financial effort e. Finally, since there is no reported impact of incumbent market share on profit, and vice versa, the indirect impact of MTR regulation on incumbent performance is not clear. This is not the case for the entrant group.
In conclusion, the results demonstrate that the relationship between profit and market share for European incumbents is weak, and asymmetric regulation could result in stronger competition across the European mobile industry, which might then negatively impact on incumbent profit. Table 2 provides the estimation results for the entrant group. Similarly to incumbents, entrants gradually build performance see the coefficients of 0. Additionally, entrant current market shares and lagged variables increase EBITDA margins with respective impacts of 0.
Clearly, economies of scale and the high irreversibility of initial fixed costs in the mobile industry are important. The endogenous impact of entrants' profit on market share is, however, more complex. In particular, a per cent increase in the current EBITDA margin raises entrants' financial capacity to gain an additional 0. The impact of European regulations is also shown in Table 2.
Broadly speaking, MTR regulation increases entrant market shares but not profit.
In particular, glide path regulation increases entrant market share by 0. Glide path regulation increases entrant attractiveness as its off-net call price can be set lower raising rivals' costs strategy. Moreover, from a dynamic viewpoint, profitability should depend more on the retail market as interconnection revenue from the fixed network is lower when MTRs fall, and hence an entrant is more incited to increase its share to make network usage efficient. Regarding the impact of asymmetric regulation, the estimation results show that only entrant market shares increase by 0.
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This outcome presents strong evidence in support of Peitz 25 who shows that asymmetric regulation directly increases entrant profit, and that entrants might rely on the benefit from higher MTRs and not from competing with the incumbent. This result, however, suggests that any advantage from higher MTRs is immediately transferred to final consumers to increase the entrants' competitive position.
The result is not surprising since entrants often have a strong incentive to enhance market shares to achieve economies of scale for example , and asymmetric regulation provides appropriate financial conditions.
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For this reason, the direct impact of asymmetric regulation on the entrant profit is insignificant. It is worth noting that the indicator of asymmetric regulation depends both on the magnitude of relative MTRs and market shares, and thus a higher indicator value does not necessarily imply allowing entrants to set higher MTRs. Rather, this can also be achieved via greater entrant share. Table 2 reports indirect impacts of MTR regulation on entrant performance. Clearly, there is no indirect effect caused by asymmetric regulation indicators on the incumbent market shares because of the insignificant relationship between profitability and market share.
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However, this is not the case for entrants, with MTR regulation having an indirect effect on profit. Specifically, a percentage reduction in MTRs via glide path regulation increases entrant shares by 0. This value is calculated from the product of the impact of asymmetric regulation on entrant market share 0.
Based on the estimation results presented above, several interesting issues in economics and regulatory policy are discussed in the following. The waterbed effect shows that changing MTRs can affect mobile prices, which is detrimental to subscribers. Indeed, the analysis shows that, by accounting for heterogeneity, profit neutrality is likely to apply to incumbents, but not entrants.
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Clearly, our study shows that European entrant MNOs can indirectly increase their profit via glide path regulation. Thus, glide path regulation supports entrant price reduction strategy to gain market share and is an appropriate regulatory instrument to promote infrastructure-based competition among European MNOs. Asymmetric regulation which applies to service providers is widespread in telecommunication markets.
Furthermore, this finding eliminates the possibility of rent-seeking behaviour and implies that entrants spend efforts to compete for new customers under asymmetric regulation. Conversely, the analysis shows that asymmetric regulation has only a modest negative impact on incumbent profitability; but since incumbent profitability is neutral with regard to MTR levels, the lower incumbent profitability is possibly a response to stronger market competition among asymmetric MNOs.
Retailing In The European Union Structures Competition And Performance
Hence, a sunset clause on current European asymmetric regulation is not recommended based on these findings. This paper empirically studies the impacts of MTR regulation in European mobile telephony. By dividing MNOs into groups and based on the relationship of firm performances, the econometric results show that there is little risk from current MTR regulation for the incumbent operators, while MTR regulation positively impacts the entrant operators. To summarise: market shares and profitability are bi-directionally linked, and this relationship is closer for entrants. Second, MTR regulation boosts entrant market share and modestly affects incumbent profitability.
Third, there is no supporting evidence of rent-seeking behaviour by entrants. Finally, entrant profit is higher as a result of increased market share. Subsequent empirical study will provide intuitive reasons for potential intervention in setting the MTRs in European wholesale markets. However, with the new communication framework in , only MTRs remain regulated.
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