From universal service to universal connectivity

Two features of the century-old policy goal of promoting universal telephone service in the United States have been enduring. Policymakers have focused on (1) wireline telephone (and more recently, fixed-line broadband) services and (2) households. The widespread adoption of mobile telephones compels a fresh examination of this focus. We construct a new measure of universal connectivity which accounts for consumers’ choices of communications technologies and for their geographic mobility over the course of the day. This measure, in turn, compels a conceptual and empirical investigation of the determinants of mobile telephone diffusion within families. Our estimations of intra-household demand for mobile service permit us to develop simulations that estimate the economic impact of modernizing a key element of existing universal service policy (viz., the Lifeline Program) to reflect the goal of improving individual connectivity. We find that a policy expansion from a single subsidy per household to multiple subsidies per eligible household members would increase mobile subscriptions by 2.25 million and Lifeline costs by $250 million

FACILITIES COMPETITION AND LOCAL NETWORK INVESTMENT: Theory, Evidence and Policy Implications*

A new approach has emerged in the U.S. and elsewhere in the world for promoting investment in local communications networks. Competition, especially facilitiesbased entry, has become a principal means to encourage the efficient amount and timing of investment in local exchange infrastructure and adoption of advanced technologies. Despite the popularity of open entry policies, the logic underlying these policies has never been worked through. Nevertheless, we find preliminary and incidental studies that support the claim that facilities-based entry stimulates investment by both incumbents and entrants. The message for policy makers is, first, to remove artificial restrictions on facilities-based entry and on incumbent investment, both as a response to competition and in advance of entry, and second, to take account of the possibility of a virtuous cycle of investment deriving from incumbent-entrant interaction. These measures promise to supplement the ordinary benefits of facilities competition that will aid in building the next generation advanced communications network. _________________________________ * - I am grateful to the Consortium for Research on Telecommunications Policy (CRTP) for financial support. This paper expands on remarks given at the fourth annual CRTP conference at the University of Michigan at Ann Arbor, June 5-6, 1998. I. NEW POLICY TOWARD LOCAL NETWORK INVESTMENT Policy makers in the U.S. and throughout the world have voiced concerns over the level of investment taking place in local communications networks which they see as critical to regional and national economic development. They blame administrative regulation of private carriers and government ownership of telecom infrastructure for distorting incentives for network modernization. In respon..

The effect of prices on fixed and mobile telephone penetration: Using price subsidies as natural experiments

A natural experiment, unintentionally conducted by the price subsidy program Lifeline Assistance, underpins our innovative strategy to estimate consumer demand for communications services. Using a national household panel containing demographic and billing information, we estimate own and cross-elasticities of demand for fixed and mobile services and find moderate substitution between the two. We control for the role of income effects by showing the subsidy has little effect on consumption of similar products and services. To account for potential bias due to endogeneity of program participation, a difference-in-differences analysis of re-sampled households results in estimates similar to the cross-sectional analysis. An asymmetry in the response to Lifeline participation arose depending on whether a household added or dropped Lifeline between samplings. We use the estimated demand parameters to simulate the impact of making the Lifeline program universal, or eliminating it altogether. In either case we find the net impact on combined fixed and mobile penetration is small.Universal service Access demand Fixed-mobile substitution Natural experiment

Benefits and Pitfalls of Network Interconnection

This paper assesses the private and social incentives for disjoint networks to interconnect under various ownership structures. Terms of interconnection are derived for a noncooperative equilibrium. We find that networks mutually profit from interconnection when it creates new services that did not exist beforehand, but also when it creates services that compete directly with existing ones. Given the opportunity to move first, an integrated network will choose not to foreclose its non-integrated rivals. Generally we find that when two or more networks contribute components to a service, double marginalization reduces industry profit and consumer surplus. For this reason, divestiture often harms consumers as well as lowering network profits. Competitive supply of gateway services reduces profit and surplus, but individual networks profit by selling off these facilities to a third party. In contrast, an integrated network will not voluntarily divest its end-to-end service. Compulsory divestiture may inflict serious harm, not only on owners of the integrated network, but on consumers as well.