Regulation and efficiency in transition: The case of telecommunications in Italy

In regulating the telecommunications industry, the separation between network and retail functions, which is designed to countervail the market power of incumbent operators, is a relevant issue. Despite its importance, little empirical research has addressed the effects of such a separation. Accordingly, this paper provides insights into the consequences of the Italian communications regulatory authority's (AgCom) decision to impose this type of separation on the incumbent telecommunications operator, Telecom Italia. In particular, the studied separation is between the firm's network-related functions, and those used for provision of its communication services. The present research finds that the type of separation implemented by AgCom allows a provider to maintain the advantages of operational scale in its network structure without dampening competition in the existing market for communications services. The study also offers further empirical evidence on the advantages of a composite vs. translog function in analyzing the multiproduct cost structure of a telecommunications operator.