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Economic Of Entry And Telecommunications Regulation

The views and opinions expressed in this submission are solely those of the authors and do not represent the views of the Department of Justice.

Slide 1

Economics of Entry and
Telecommunications Regulation

Simon Wilkie
Center for Communications Law and Policy
USC Law School

D.O.J. 2007 Telecommunications Symposium

Slide 2

Overview

  • Review of market definition & structure
  • Economics of Regulation/Deregulation
  • Issue 1 Bundled Products
  • Issue 2 Market Segmentation
  • Issue 3 Barriers to Entry
  • Issue 4 Wireless Entry

Slide 3

Market Definition

  • Challenges to traditional regulatory market definitions: Voice Cable TV Wireless
  • Bundled products what is the good?
  • What is market dominance in a bundle if competitors have different mix of products
  • Services versus access to networks
  • Market segmentation and price discrimination
  • Geographic market definition and deployment
  • Important to get the economics right!

Slide 4

Market Definition

  • What is the product?
  • Access versus Telecom Services
  • Wireless substitution
    • Minutes migration to wireless
    • No economic evidence of access substitution
  • VOIP versus POTS
    • Cable entrants and others deploying VOIP
    • Rapid adoption in last few years
    • Minute substitution
    • Number Portability Data suggests VOIP does not provide as strong a competitor for access as POTS
  • Premature Deregulation may harm consumers

Slide 5

Natural Monopoly Issues

  • Large Fixed Costs
    • Costs are “sunk” and not reversible
    • E.G. Verizon’s FIOS build
  • Average unit cost falling over the relevant range
  • “Dumb Pipe Paradox”
  • Should expect strategic behavior
  • 1996 Aims to replace regulation with competition
  • Naïve deregulation may fail

Slide 6

Issue 1: Bundled Products

  • Traditional Economic Model of Bundling
    • Bundle substitutes to raise “stand alone prices”
    • Bundled discounts
  • Not that relevant telecom services
    • Industry tells us driver is reduced churn
  • Increase the NPV of a customer even with no change in prices

Slide 7

Issue 1: Bundled Products

  • Model of “Viscous Demand” Radner 2003 JET
  • Consumers don’t always look at their bills
    • Transaction & Information costs
    • Consumers only churn if an “event” triggers re-optimization
  • Bundling increases the “shock threshold”
    • Consumers have to change 3 services not 1
  • Equilibrium with price dispersion
  • Means welfare analysis is tricky

Slide 8

Issue 2: Segmentation and Competition Raising Prices

  • Market composed of different segments
  • Entrant targets one specific segment
  • Leads to more differentiated products
  • All prices may rise
    • Consumers left behind not targeted by the entrant.
  • Welfare Analysis is not obvious

Slide 9

Issue 2: Segmentation and Competition Raising Prices

  • Theory: Chen and Riordan
    • Economics working paper CU Boulder
  • Case Study 1 DBS versus Cable
    • Goolsbee and Petrin working paper version 2001
  • Case Study 2 Broadband
    • Chen and Savage Working paper CU Boulder 2007
  • Case Study 3 Price Flexibility in California
    • Prices rises for basic services

Slide 10

Issue 3: Barriers to Entry

  • Interconnection
    • Agreements may be difficult
    • Delays entry and costly litigation raise rivals costs
  • Exclusive Provider Agreements
    • Master Planned Communities
    • FCC focused on Video but also applies to Telecom
    • Can exclude entry but speed deployment
  • Special Access Issues
    • Essential Input for telecom entrants
    • Incentive to raise rivals costs
    • FCC capped SBC VZ prices in 2005 mergers
    • Cap expires fear of price hikes and discrimination

Slide 11

Issue 4: Wireless entry

  • Limited wireless competitor for wireline access & broadband (Leap Metro PCS)
  • Long history of wireless entrant failure and exit
  • AWS auction; No significant new entry
  • 700 MHz auction: best opportunity for entry
  • Spectrum caps worked in 1994
    • Auction with no caps = Incumbent merging with entrants with no DoJ review
  • Caps in auction but not holdings
    • Transfers would lead to DoJ & FCC merger review

Slide 12

Summary

  • Market is evolving
  • New products, technology, and strategies
  • More economic analysis is required
  • Both naïve regulation and deregulation without analysis may harm consumers
Updated December 29, 2023