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Unnatural monopolies in local telephone

Unnatural monopolies in local telephone. Richard T. Shin Mathematica Policy Research, Inc. John S. Ying University of Delaware and University of

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Unnatural monopolies in local telephone

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  1. Unnatural monopolies in local telephone Richard T. ShinMathematica Policy Research, Inc. John S. Ying University of Delaware and University of California, Irvine. The RAND Journal of Economics, Vol. 23, No.2 (Summer, 1992), pp. 171-183 Lecturer Chaowei Fan Illinois State University Jan. 18, 2011

  2. What doest the paper want to tell us? Abstract: We attempt to overcome the serious data problems of past telecommunications cost studies by focusing on local exchange carriers (LECs). With enough degrees of freedom to yield precise estimates, our global subadditivity tests show that the cost function is definitely notsubadditive. The results suggest that the benefits to breaking up the monopoly outputs of existing LECs substantially outweigh the potential losses in efficiency. They also support permitting entry and increasing competition in local exchange markets. Furthermore, given the competitive nature of long distance service, it is doubtful that the predivestiture Bell System was a natural monopoly Shortly speaking, the regulator should not break up AT&T

  3. What is Natural Monopoly? The definition of natural monpoly is that the cost function is subadditive, which means whether it is cheaper to have one firm produce total industry output or whether additional firms would yield lower total cost. For single-product case, For mutiproduct case,

  4. What is the relationship between subadditivity cost and economy of scale ? For single-product case, economy of scale is the sufficient condition for subadditivity cost, but not necessarily. For mutiproduct case, economy of scale are neither necessary nor sufficient for subadditivity cost

  5. Brief Introduction to Landline Voice Market Overall: Landline voice is the oldest of the telecommunications markets discussed here; historically, it was the entire telecommunications industry. Before 1970,, the landline voice market was mostly served by AT&T with its affiliated local Bell operating companies. During the 1970s and 1980s, the FCC allowed increased competition for long-distance and customer-premises equipment that culminated in the divestiture of AT&T in 1984. Long-distance Voice Market: Historically, long-distance voice service was provided as a monopoly service by AT&T. During the 1960s and 1970s, the FCC allowed other companies-namely, Microwave Communications Inc. (MCI) and others-to provide long-distance services in direct competition with AT&T from its local telephone subsidiaries and full-fledged competition in the long-distance industry. This movement from a regulated monopoly provision of services to competitive services from many companies would be repeated throughout different industry segments.

  6. Local Voice Market: The path taken by the local voice market has been similar to that of the lone-distance market. Each local market was historically served by a monopoly local telephone company that was rate-of-return regulated by the state regulatory board. Most cities and heavily populated areas were served by subsidiaries of AT&T until divestiture in 1984. At divestiture, local telephone subsidiaries were separated from AT&T’s long-distance and equipment pieces. The local telephone pieces of AT&T were broken into seven different companies called regional Bell operating companies(RBOCs): NYNEX, Bell Atlantic, BellSouth, Ameritech, Southwestern Bell, US West, and Pacific Telesis. Types of Local Companies Incumbent Local Exchange Companies(ILECs) ------Regional Bell Operating Companies(RBOCS) ------Independent Telephone Companies Competitive Local Exchange Companies (CLECs) ------Sometimes known as CAPs or ALTs

  7. Elasticity: at the sample mean for all variables, it equals 0.9580 Increasing access lines, local and toll calls by 1% increases costs by slightly less than 1%, indicating mild scale economies

  8. Basic Results(the relation between monopoly and two firms)

  9. Positive Marginal Costs

  10. My Doubts to This Paper: Since the 22 Bell operating companies(BOCs or “Baby Bells”) were an integral part of the Bell System, if we find that not even the LECs are natural monopolies, then the possibility of AT&T being a natural monopoly is remote. Also, if we find evidence of no subadditivity in LECs, then AT&T may not have been a cost minimize and could have lowered its total system cost by breaking u the BOCs -------What is the relationship between original Bell and Baby Bells, also what is the relationship among each Baby Bell? 2. Geographical Problems: there might be only one provider in certain area, and there were two or more in some other areas. How to eliminate the influence of geographical differences?

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