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Economics of Telecom

TC 310 May 15, 2008. Economics of Telecom. Discussion Point. Which serves telecom customers better? Free Market? Regulated Market? Does this apply to Horizontal, Vertical, or both markets?. Network Effects. Value based on Number of Users Tipping Point AKA Critical Mass

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Economics of Telecom

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  1. TC 310 May 15, 2008 Economics of Telecom

  2. Discussion Point • Which serves telecom customers better? • Free Market? • Regulated Market? • Does this apply to Horizontal, Vertical, or both markets?

  3. Network Effects • Value based on Number of Users • Tipping Point • AKA Critical Mass • Creates cut-throat competition • Types of Network Effects • Direct • Indirect • Evil Monopoly or Creative Destruction

  4. Economies of Scale • Similar to Network Effects • Why different? Where is the value added? • Costs to firms • Fixed; up-front • Sunk; one purpose • Marginal; doing business • For telecom industries, which are high, which are low?

  5. Economies of Density • Economies of scale based on geography • Negative relationship between density and cost • Role of Fixed and Sunk Costs • Marginal costs similar

  6. Natural Monopolies • NE + EoS=Monopolies? • Exponential economies of scale • Monopolies best able to reduce prices • Examples? • Kingsbury Commitment-dual monopoly natural monopoly • State Regulator Benefits • Local income • Social benefits without “taxes” • Public Choice Theory

  7. Last Mile Bottleneck • Telecom companies frequently vertically integrated • Economies of scope • Last Mile facility is most vital for vertical integration and monopoly leveraging • Discriminate against independent competing products • Access to customers

  8. Platform Monopoly • Traditionally competition helps platform • One monopoly profit principle • Complementary externality • When doesn't this apply? • Competition threatens platform • Price regulated platform (Baxter's Law)‏

  9. Cross-Platform Competition • Effective Competition • Good for consumers? • Equivalence • Feasibility • Access • Difficult for Regulators? • Non-neutral regulation

  10. Convergence • Historically communication regulated by medium • Point-to-point is telephone (Title II)‏ • Broadcast is radio/TV (Title III)‏ • New technologies blurred • Cable (Title VI)‏ • Cell Phones (Title III)‏ • Examples of technology convergence

  11. Internet Convergence • Media available • Digital Subscriber Line (telephone)‏ • Cable • Wireless • Electric Lines • Function • Telephone, TV, Radio, new applications • Regulation Implications? • Wireless replacement, Internet replacement of Phones

  12. Economics Revisited • Traditional Economies still apply to infrastructure • Do they apply to services? • Competition more efficient, is it fair to society?

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