Real Options and the Costs of the Local Telecommunications Network

The Telecommunications Act of 1996 invites entry in the local telecommunications networks whereby entrants will lease parts of the network ("unbundled network elements") from incumbents "at cost plus reasonable profit." A crucial question in the implementation of the Act is the appropriate measure of cost. This paper examines the economic principles on which the cost calculation should be based. I conclude that the appropriate measure of cost (maximizing allocative, productive, and dynamic efficiency) is forward-looking economic cost and not the historical, accounting, or embedded cost of the incumbent’s network. In calculating costs, demand and supply uncertainty, as well as the asymmetric position of incumbents and entrants should be taken into account. Close examination of the issue of uncertainty in the local telecommunications network reveals that (i) for most unbundled network elements, there is little demand uncertainty; and (ii) that those elements that face significant uncertainty, do not have sunk value. Thus, the incumbent does not face higher expected cost by investing. Moreover, the rewards of the incumbent can be higher because buyers prefer to buy services from the owner of the network. Finally, strategic considerations in oligopolistic interaction are likely to dominate any uncertainty considerations and will increase the incentive of incumbents to invest.telecommunications, regulation, cost, real options

Competition Policy in Network Industries: An Introduction

The author discusses issues of the application of antitrust law and regulatory rules to network industries. In assessing the application of antitrust in network industries, we analyze a number of relevant features of network industries and the way in which antitrust law and regulatory rules can affect them. These relevant features include (among others) network effects, market structure, market share and profits inequality, choice of technical standards, relationship between the number of active firms and social benefits, existence of market power, leveraging of market power in complementary markets, and innovation races. The author finds that there are often significant differences on the effects of application of antitrust law in network and non-network industries.

Telecommunications Regulation: An Introduction

This paper examines the justifications, history, and practice of regulation in the US telecommunications sector. We examine the impact of technological and regulatory change on market structure and business strategy. Among others, we discuss the emergence and decline of the telecom bubble, the impact on pricing of digitization and the emergence of Internet telephony (VOIP). We also examine the impact of the 1996 Telecommunications Act on market structure and strategy in conjunction with the history of regulation and antitrust intervention in the telecommunications sector. After discussing the impact of wireless technologies, we conclude by venturing into some short term predictions. We express concern about the derailment of the implementation of the 1996 Act by the aggressive legal tactics of the entrenched monopolists (the local exchange carriers), and we point to the real danger that the intent of Congress in passing the 1996 Act to promote competition in telecommunications will never be realized in local telecommunications in the fashion that the 1996 prescribed. The decision of AT&T to stop marketing both long distance and local services to residential customers is a direct result of the derailing of the 1996 Act that has allowed the local service monopolists (1) to enter long distance while the local market was still monopolized; and (2) to leverage their monopoly power in the local market to the long distance market. We also discuss the wave of mergers in the Telecommunications and cable industries, the telecom meltdown of 2000-2003, and issues that arose from the triennial review by the FCC of implementation of the 1996 Act.

Loyalty/Requirement Rebates and the Antitrust Modernization Commission: What is the Appropriate Liability Standard?

I discuss and assess the various standards for establishing liability for loyalty discounts offered under a requirement contract. I find that the standard proposed by the Antitrust Modernization Commission is likely to result in many cases of violation that are not caught. The safe harbor defined by the AMC would permit activity that is in fact anticompetitive. I propose instead a structured rule of reason test that relies on consumers’ surplus comparisons under the loyalty /requirement practice and the but-for world. The proposed standard does not have a safe harbor based on a price/cost comparison because such comparisons do not generally correspond to consumers’ surplus comparisons.bundling, loyalty discounts, requirement contracts, monopolization, antitrust

U.S. Telecommunications Today, April 1999

This short essay examines the current conditions in the US telecommunications sector (April 1999). We examine the impact of technological and regulatory change on market structure and business strategy. Among others, we examine the impact on pricing of digitization and the emergence of internet telephony. We briefly examine the impact of the 1996 Telecommunications Act on market structure and strategy in conjunction with the history of regulation and antitrust intervention in the telecommunications sector. After discussing the impact of wireless technologies, we conclude by venturing into some short term predictions. We express concern about the derailment of the implementation of the 1996 Act by the aggressive legal tactics of the entrenched monopolists (the local exchange carriers), and we point to the real danger that the intent of Congress in passing the 1996 Act to promote competition in telecommunications will not be realized. After discussing the impact of wireless technologies, we comment on the wave of mergers in the Telecommunications and cable industries.

Broadband Openness Rules Are Fully Justified by Economic Research

This paper responds to arguments made in filings in the FCC’s broadband openness proceeding (GN Dkt. 09-191) and incorporates data made available since my January 14th filing in that proceeding. Newly available data confirm that there is limited competition in the broadband access marketplace. Contrary to some others’ arguments, wireless broadband access services are unlikely to act as effective economic substitutes for wireline broadband access services (whether offered by telephone companies or cable operators) and instead are likely to act as a complement. Nor will competition in the Internet backbone marketplace constrain broadband providers’ behavior in providing “last mile” broadband access services. The last mile, concentrated market structure, combined with high switching costs, provides last mile broadband network providers with the ability to engage in practices that will reduce social welfare in the absence of open broadband rules. Furthermore, the effect of open broadband rules on broadband provider revenues is likely to be small and can be either positive or negative. Unfortunately, various filings have misstated or mischaracterized the results on the economics of two-sided markets. Contrary to what some have argued, allowing broadband providers to charge third party content providers will not necessarily result in lower prices being charged to residential Internet subscribers. This is true under a robust set of assumptions. Despite some parties’ mischaracterization of the economic literature, price discrimination by broadband providers against third party applications and content providers will reduce societal welfare for numerous reasons. This reduction in societal welfare is especially acute when price discrimination is taken to the extreme of exclusive dealing between broadband providers and content providers. Antitrust and consumer protection laws are insufficient to protect societal welfare in the absence of open broadband rules.Network Neutrality, Internet, Discrimination, Prioritization, Two-Sided Market, Market Power, Termination Fee, Broadband

Antitrust and payment technologies: commentary

Antitrust law ; Payment systems