TNAG-1779-FCO40-2539-Hong-Kong-international-telecommunications-1988 — Page 121

1. Economies of scale in telecommunications network provision

2.

The upper part of Exhibit 1.4 shows the method of computing economies of scale. Firstly we calculate the costs of providing a second telecommunications network, serving some part of the total telecommunications market in the territory (see left hand column). These costs are divided into three categories :

elements of cost which are incurred to the same extent whether the customers are served by the second network or by an incremental expansion of the main network

elements of costs which would be incurred whether customers are served by the second network or by an incremental expansion of the main network, but only partially so in the latter case

elements of costs which are only incurred if a second network is constructed.

Examples of each of these three categories are given on Exhibit 1.4. We multiply the first category by 100%, the second category by that percentage (which may vary among individual items within the category) which would also be incurred under the monopoly network solutions, and the remaining category by 0%. In this way we obtain a figure for the incremental cost which would be incurred by the monopoly network provider if customers or traffic otherwise destined for the second network remained with the main one. The difference between the cost of provision under the competitive scenario and the monopoly one provides, as marked on the diagram, a measure of the economies of scale associated with monopoly provision.

Economies of integration in joint provision of cable television and telecommunications networks

The analysis of economies of integration (or scope) is based on the same principle. The costs of setting up a cable television network separately from the main telecommunication network are first assessed (see lower part of Exhibit 1.4, left hand column). These are divided into three categories, corresponding to the three classifications used for analysis of economies of scale. In this way a comparison is made between the cost of separate provision of a cable television network with the cost of provision when integrated with the main telecommunications infrastructure. The difference between these two provides a measure of the economies of scope associated with integration of the two networks.

We also wish to measure the economies of integration which follow from combining the cable television network with the second telecommunications network, not with the main one. A calculation similar to that illustrated on Exhibit 1.4 is required, except that in this case it is the cable television network which is assumed to be pre-existing; the two columns of data correspond to the cost of constructing a second telecommunications network with and without the benefit of ownership of such a pre-existing cable television facility.

13.

-