Paul Scott, Assistant Professor of Economics, NYU Stern School of Business
We develop a model of competition in prices and infrastructural investment among mobile network providers. Market shares and service quality (download speed) are simultaneously determined, for demand affects the network load just as delivered quality affects consumer demand. While consolidation typically has adverse impacts on consumer surplus, economies of scale, which we derive from physical principles, push in the other direction. We find that consumer surplus is maximised at a relatively high number of firms, and that the optimal number of firms is higher for lower-income consumers. Total surplus, meanwhile, is maximised at a moderate number of firms. Our modelling framework allows us to quantify the marginal social value of allocating more spectrum to mobile telecommunications, finding it is roughly five times an individual firm’s willingness to pay for a marginal unit of spectrum.