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Quantitative Analysis of Wholesale Market Regulation. Agenda. Introduction to Wholesale Market Regulation. ILEC / CLEC Regulated price caps Why we need regulation?. Project Objective. Analyze the behavior variation of ILECs and CLECs with changes in price cap.

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## Quantitative Analysis of Wholesale Market Regulation

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**Introduction to Wholesale Market Regulation**• ILEC / CLEC • Regulated price caps • Why we need regulation?**Project Objective**• Analyze the behavior variation of ILECs and CLECs with changes in price cap**Modeling Wholesale Regulation**REGULATORY ACTION Costs (supply) Wholesale price caps WHOLESALE REG MODEL Willingness to pay (demand) Consumer Surplus Profits (price, quantities)**Modeling Demand**Standard Deviation for service 1 and service 2 Mean for service 1 and 2 DEMANDMODEL Number of users Maximum Willingness to pay Correlation coefficient between service 1 and service 2 Price for service 1 and service 2 Number of users that choose service 1 and number of users that choose service 2 and consumer surplus Normal distribution is used to model the willingness to pay Users choose the services to maximize his surplus Assumption: Users choose service 2 if the surplus obtained is the same**Modeling Cost**COST MODEL Number of users that choose service 2 Number of users that choose service 1 Retail cost for service 1 and service 2 Wholesale cost for service 1 and service 2 Total Cost = Number of users for a serviceα, 0<= α<= 1 Retail Cost = Total Cost * β, 0<= β <= 1 Wholesale Cost = (1 – β) * Total Cost**Modeling Profits**Demand Model PROFIT MODEL Price caps for service 1 and service 2 Number of users Cost Model Profit for ILEC and Profit for CLEC If (pw < cw) then CLEC chooses to buy wholesale service from ILEC Else CLEC will build his infrastructure Assumption: If ILEC and CLEC offer the same price, the consumers choose CLEC over ILEC**Simulation Data**• Input data used: • Mean 1 = 5 • Mean 2 = 5 • Standard Deviation 1 = 1 • Standard Deviation 2 = 1 • Max willingness to pay 1 = 10 • Max willingness to pay 2 = 10 • Number of users = 50**Simulation I**• No costs to ILEC • Correlation coefficient = -0.5 • Simulation is done for different price caps for the two services**Results**ILEC Profit CLEC Profit Price cap service 1 = 0, Price cap service 2 = 0**Results**ILEC Profit CLEC Profit Price cap service 1 = 5, Price cap service 2 = 5**Results**ILEC Profit CLEC Profit Price cap service 1 = 0, Price cap service 2 = 5**Simulation II**• Positive correlation between services and using the previous data • Correlation Coefficient = +0.5 • Simulation is done for different price caps for the two services**Simulation III**• Same costs to ILEC and CLEC • Correlation coefficient = -0.5 • Simulation is done for different price caps for the two services**Simulation IV**• 90% of CLEC cost to ILEC • Correlation Coefficient = -0.5 • Simulation is done for different price caps for the two services**Future work**• Using the model to represent segmented Regulation • Using more than 2 services

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