Economic Theories of Telecommunication Regulation and Market Structure

The Telecommunication Ecosystem

The telecommunication ecosystem realizes the transfer of data in analogue or digital form via all kinds of networks.

Connecting Separate Worlds

The ecosystem connects technological progress, innovations, user behavior, and market conditions.

Market Shift: From Monopoly to Competition

This shift was driven by governmental initiatives, low market entry barriers in the beginning, and low access costs, including:

• Line sharing
• Unbundled local loop
• Bitstream access

Telecommunication Value Chain: 4 Major Elements

The value chain consists of:

1. Network Provisioning
2. Transmission Services
3. Billing and Customer Care
4. Acquisition and Point of Sales

Convergence and Implications

First Level of Convergence

This involves the fusion of the telecommunication and IT industries, with the internet acting as a major driver.

Second Level of Convergence

This involves the additional integration of media, highlighting the importance of overlapping and merging markets. Structural change results in the lower importance of the way of distribution.

Public Interest Theory of Regulation

Normative analysis (when should regulation occur?) is used to produce a positive theory (when does regulation occur?).

• Regulation is supplied in response to the public’s demand for the correction of a market failure or for the correction of highly inequitable practices (for example, price discrimination or externalities).
• If a market is a natural monopoly, the public will demand the industry be regulated because a first-best solution is not achieved in the absence of regulation.
• Net welfare gains result from regulating the industry, and this potential for welfare gains generates the public’s demand for regulation.

The Capture Theory

Capture theory states that regulation is supplied either in response to the industry’s demand for regulation, or the regulatory agency comes to be controlled by the industry over time. In other words, regulators are captured by the industry.

Stigler's Assumptions and Predictions

Stigler put forth a set of assumptions and generated predictions about which industries would be regulated and what form regulation would take as logical implications:

• The basic resource of the state is the power to coerce.
• Agents are rational in the sense of choosing actions that are utility maximizing.

Goals Firms Pursue by Influencing the State

According to Stigler, firms pursue four different goals by influencing the state:

• Direct subsidy of money
• Control over entry by new competitors
• Control over substitutes and complementary products
• Price fixing

The Transaction Cost Theory and Principal-Agent Relations

The principal-agent theory deals with principal-agent relations based on the division of labor. These relations are characterized by:

• Asymmetrically distributed information.
• Uncertainty about the occurrence of certain environmental situations as well as the contract partner’s behavior.

Principal-agent relations occur when one party (the principal) delegates decisions and implementation competencies to another party (the agent), whose decisions impact not only their own welfare but also the principal’s welfare.