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Abstract:
One of the most heated debates in the current efforts to re-write the Communications Act has been whether the federal government should impose "Network Neutrality" requirements on broadband service providers. While we argue neither for nor against the need for Network Neutrality legislation in this article, our analysis shows that policymakers should avoid Network Neutrality mandates that have the intent or effect of "commoditizing" broadband access services since such a policy approach is likely to deter facilities-based competition, reduce the expansion and deployment of advanced communications networks, and increase prices. Given the economic characteristics of local communications networks, policies that promote commoditization of broadband access could lead to the monopoly provision of advanced broadband services in many markets. This outcome would harm consumers substantially.

Network Neutrality, Industry Structure, John Sutton, commoditization

Abstract:
While scores of papers have drawn on the basic insights of the early founders of the economic theory of regulation, the ability to cogently present the general form of the theory in a readily accessible graphical format has only recently emerged. While providing a promising approach for illustrating and analyzing regulatory (and deregulatory) outcomes, however, the analysis presented to this point appears to require the derivation of several different graphs. The result is that, while stemming from a single paradigmatic framework, the graphical approach fails thus far to offer a single unified basis for illustrating the general economic theory of regulation. In this paper, we seek to fill this lacuna by providing a simple, yet powerful, unifying graphical construct for presenting the myriad implications of that theory.

Abstract:
When the facilities of an incumbent monopolist are made available to potential competitors through some type if "essential facilities" or related claim, a common concern is that the ability to "buy" inputs substantially attenuates the incentive to "make" inputs. In this paper, we evaluated both theoretically and empirically the relationship between "make" and "buy." In our particular construct, three sometimes-conflicting effects are relevant to the "make-or-buy" decision, of which the substitution effect is only one. Our empirical example considers the deployment of switching facilities by entrants to local exchange telecommunications markets, and these empirics indicate that the substitution effect is not dominant. While particular to telecommunications, our findings do support the general notion that the substitution effect is not the only relevant consideration, either theoretical or empirical, for policy makers in selecting what inputs to make available to entrants when promoting competition in the utility industries.

Abstract:
This Paper discusses important economic characteristics of local exchange markets and the firms that participate therein. First, this Paper explains that entry into the local exchange market requires large fixed and sunk costs, making entry risky and necessitating scale economies. Consequently, only a few local access networks can supply the market. These few local access networks cannot be small, however, because a large market share is required to realize sufficient scale economies to effectively compete with the Incumbent Local Exchange Carrier or "ILEC" and survive.

Secondly, using publicly available data from the Federal Communications Commission and industry filings with the Security and Exchange Commission, this Paper explains that acquiring sufficient market share in network services to realize scale economies may be difficult for entrants who either attempt to purchase unbundled network elements from the incumbent or attempt to build their own network from the ground up. Instead, given the substantial scale economies required in the local exchange network, it may not be possible for a single carrier to acquire sufficient retail market share in a timely manner to exhaust economies of scale in its wholesale network. An integrated firm supplying the wholesale market, in an effort to expand output, is conflicted; the integrated firm's retail market share raises the opportunity cost of wholesale supply.

Accordingly, this Paper shows that if economies of scale are sufficiently large, reaching a scale of operation that allows the entrant to compete with the ILEC may be best achieved through the entry of an Alternative Distribution Company or "ADCo", which is a wholesale-only "carriers'-carrier" for the proverbial "last mile." (This is a very different concept from a "LoopCo," which is formed via the structural separation of the ILEC's network facilities and marketing operations.) The ADCo can consolidate the consumer demand held by retail CLECs, thereby reducing risk and costs by expanding output quickly. The disincentives to wholesale supply possessed by the integrated firm, furthermore, do not exist for the ADCo, and therefore the ADCo - unlike the ILEC - has no incentive to sabotage its customers (i.e., the ability to increase or raise the cost of a rival's key input of production by non-price behavior.) As a result, while the number of local access networks the market can sustain may be few, the exclusively wholesale nature of the ADCo nonetheless permits the number of providers of advanced telecoms products and services to be many (the raison d'etre of market "restructuring").

Equally as important, given the existence of these discriminatory incentives resulting from the current and foreseeable economic conditions of the U.S. telecommunications industry, the most probable and viable long term, competitive market structure involves a substantial presence by an unintegrated, but larger wholesale supplier - in other words, an ADCo - to function efficiently. As such, their presence in the market should be welcomed and encouraged.

Telecommunications, Competition, Unbundling, 1996 Act

Abstract:
This Policy Paper discusses important economic characteristics of local exchange markets and the firms that participate therein. First, this Policy Paper, building on the work in PHOENIX CENTER POLICY PAPER NO. 10, explains that entry into the local exchange market requires large fixed and sunk costs, making entry risky and necessitating scale economies. Consequently, only a few local access networks can supply the market. These few local access networks cannot be small, however, because a large market share is required to realize sufficient scale economies to effectively compete with the Incumbent Local Exchange Carrier or "ILEC" and survive.

Secondly, using publicly available data from the Federal Communications Commission and industry filings with the Security and Exchange Commission, this Policy Paper explains that acquiring sufficient market share in network services to realize scale economies may be difficult for entrants who either attempt to purchase unbundled network elements from the incumbent or attempt to build their own network from the ground up. Instead, given the substantial scale economies required in the local exchange network, it may not be possible for a single carrier to acquire sufficient retail market share in a timely manner to exhaust economies of scale in its wholesale network. An integrated firm supplying the wholesale market, in an effort to expand output, is conflicted; the integrated firm's retail market share raises the opportunity cost of wholesale supply.

Accordingly, this Policy Paper shows that if economies of scale are sufficiently large, reaching a scale of operation that allows the entrant to compete with the ILEC may be best achieved through the entry of an Alternative Distribution Company or "ADCo", which is a wholesale-only "carriers'-carrier" for the proverbial "last mile." (This is a very different concept from a "LoopCo," which is formed via the structural separation of the ILEC's network facilities and marketing operations.) The ADCo can consolidate the consumer demand held by retail CLECs, thereby reducing risk and costs by expanding output quickly. The disincentives to wholesale supply possessed by the integrated firm, furthermore, do not exist for the ADCo, and therefore the ADCo - unlike the ILEC - has no incentive to sabotage its customers (i.e., the ability to increase or raise the cost of a rival's key input of production by non-price behavior.) As a result, while the number of local access networks the market can sustain may be few, the exclusively wholesale nature of the ADCo nonetheless permits the number of providers of advanced telecoms products and services to be many (the raison d'etre of market "restructuring").

Equally as important, given the existence of these discriminatory incentives resulting from the current and foreseeable economic conditions of the U.S. telecommunications industry, the most probable and viable long term, competitive market structure involves a substantial presence by an unintegrated, but larger wholesale supplier - in other words, an ADCo - to function efficiently. As such, their presence in the market should be welcomed and encouraged.

Telecommunications, Competition, Unbundling, 1996 Act

Abstract:
This paper surveys the impairment standard of Section 251(d)(2)(B) of the Telecommunications Act of 1996 and its content as it has been interpreted by both the FCC and the Courts. The Congressional standard relating to unbundling clearly pointed to its impact on each CLEC's output, and relevant Court decisions have repeatedly upheld this view. We develop a formal theoretical model of impairment that relates element Availability to CLEC output. This theoretical model is then subjected to empirical tests.

1996 Telecommunications Act, unbundling, FCC, Federal Communications Commission, telecommunications, communications, regulation, impairment, policy, UNE-P, UNE Platform, UNE-L, UNE-Loop, UNE Loop, UNE-Platform, Ford, Ekelund, Beard, competition, entry

Abstract:
This POLICY PAPER presents an economic model showing how incumbent local exchange carriers may deter efficient facilities-based entry for high capacity loop facilities through the use of quantity-discount contracts for Special Access services. Since efficient entry is deterred, these contracts are socially inefficient. The theoretical model also shows that the entry-deterring effects of the contracts are eliminated if high-capacity circuits are made available at prices based on economic costs (e.g., TELRIC) and made available without use restrictions historically applied to such access. To foster efficient facilities-based entry, federal policies must address the entry-deterring components of Special Access contracts and make high-capacity facilities available on an unbundled basis at cost-based prices.

Special Access, Telecommunications, Market Power, De-Regulation

Abstract:
In this article, we calculate how many lives will be lost if the United States continues to prohibit the use of financial incentives to motivate organ donation. We do this to motivate policymakers to stop implementing alternative policy proposals that have little effect on the supply of organs but that temporarily quiet the outcry for resolving the transplant organ shortage.

organ transplant, organ donation, policy, legislation, organ procurement, waiting lists, mortality, financial incentives, altruistic donation, demand, organ shortage, cadaveric organ donation

Abstract:
The Bell Operating Companies ("BOCs") argue that Total Element Long Run Incremental Cost (TELRIC) prices set by State public service commissions have no nexus to the BOCs' actual forward-looking costs but are, instead, based on retail prices with the goal of ensuring that competitors have an adequate (if not outright excessive) margin, thus resulting in "parasitic" competition. This Policy Paper, however, empirically demonstrates that the data do not support the Bells' contentions, finding that the wholesale price for combination of unbundled elements is motivated primarily by forward-looking costs and secondarily by BOC retail profit margins. Simply stated, wholesale prices for UNE-P are not directly related to retail prices for local telephone service. In fact, rather than set rates below costs, the States more often than not have actually preserved some BOC profit in a politically sensible "50/50" split between the desired outcomes of new entrants and the incumbents. The fact that BOC margins are declining is an intended consequence of Section 251(d) the 1996 Act and a rational public policy, because TELRIC pricing deliberately does not incorporate the monopoly rents the BOCs have traditionally enjoyed in the wholesale prices for UNEs.

Equally as important, a financial analysis of the BOCs' own publicly stated retail and wholesale revenues and operational costs for local phone service refutes the BOCs' claim that wholesale revenues are insufficient to cover wholesale operational costs. Quite to the contrary, the data indicate that even though EBITDA margins for wholesale lines are approximately half that of retail lines, the BOCs' wholesale margins are nonetheless positive, with EBITDA margins in percentage terms (revenues minus cost divided by revenues) for retail and wholesale services averaging 55% and 40%, respectively, and the wholesale EBITDA margin averaging about 40% of the retail EBITDA margin.

Telecommunications, Competition, Unbundling, TELRIC

Abstract:
In this paper, we estimate demand curves for unbundled loops sold by incumbent local exchange telecommunications carriers to their retail rivals. Of primary interest are the cross-price effects between unbundled loops purchased with and without unbundled switching. As expected, we find downward-sloping demand curves for unbundled elements, with own-price elasticities in the elastic region of demand. Interestingly, however, we also find no evidence of positive cross-price elasticities between alternative modes of unbundled element entry.

telecommunications, competition, policy, communications, TELRIC, UNE-Platform, UNE-P, UNE-L, UNE-Loop, unbundling, unbundled, network, elements, UNEs, UNE, FCC, Federal Communications Commission, 1996 Telecommunications Act, TELRIC, LRIC, long run incremental cost

Abstract:
Many policymakers have recently expressed concern over the practice of multichannel video programming distributors ("MVPDs") such as cable and satellite video providers, to "bundle" a large number and variety of channels together into a "take-it-or-leave-it" package. In this BULLETIN, we describe a set of circumstances in which a market defect will lead to the bundling of potentially objectionable content with generally desired content. Our model focuses on the role that advertisers and video programming vendors play in the network bundling of MVPDs. Our economic model illustrates the role these "third parties" play in an MVPD's decision to deliver particular channels of video programming to households in a "forced bundle" of desired and potentially objectionable programming that does not give consumers the option to exclude objectionable programming from the purchased bundle. Forced bundles appear in both monopoly and competitive structures because the conditions that give rise to this market defect make these "forced bundles" resistant to changes in market structure. As a result, policymakers should look at all participants in the multichannel video distribution market, not just retail distributors, as potential sources of forced bundling problem.

a la carte, cable, video, market defect

Abstract:
Recent reports on the financial consequences of UNE-P sales for Bell Operating Companies have drawn additional attention to long-standing complaints by the BOCs that such sales are confiscatory, and amount to "subsidized competition." This paper subjects the conclusions of these claims and the financial studies upon which they are based to careful scrutiny, and finds that they are largely without merit. Errors in both the alculation of unbundled element revenues, and in the wholesale costs of providing unbundled elements, are identified. Using actual payments by a representative CLEC and publicly available ARMIS expense data, we obtain realistic revenue and current cost figures usable for financial analyses. Our analysis suggests that the wholesale business, taken alone, is profitable for the BOCs.

telecommunications, competition, policy, communications, TELRIC, UNE-Platform, UNE-P, UNE-L, UNE-Loop, unbundling, unbundled, network, elements, UNEs, UNE, FCC, Federal Communications Commission, 1996 Telecommunications Act, TELRIC, LRIC, long run incremental cost, below cost, actual cost, embedded cost

Abstract:
Recent reports by financial analysts on the financial consequences of UNE-P sales for Bell Operating Companies have drawn additional attention to long-standing complaints by the BOCs that such sales are confiscatory and amount to "subsidized competition." This Policy Paper subjects the conclusions of these financial studies to careful scrutiny, and finds that they are largely without merit. Errors in both the calculation of unbundled element revenues, and in the wholesale costs of providing unbundled elements, are identified. Using actual payments by a representative CLEC and publicly available ARMIS expense data, we obtain realistic revenue and current cost figures usable for EBITDA type financial analyses. Our analysis suggests that positive EBITDA margins are the rule. Even the inclusion of depreciation and amortization does not materially alter this conclusion, as EBIT margins are also found to be positive for each BOC. In addition, because these analysts' reports are intended exclusively to provide investment advice, they are not useful for evaluating the social impacts of required element sales and, therefore, should not provide the basis for public policy decision-making.

Telecommunications, Competition, Unbundling

Abstract:
In this paper, we attempt to shed light on an important policy question: Does the current way by which providers compensate each other for the exchange of voice over Internet Protocol (VoIP), wireless, local, and long distance calls inhibit broadband deployment? This question is timely, as the Federal Communications Commission is presently considering a comprehensive intercarrier compensation reform proposal that would establish lower and more uniform rates for the transport and termination of all forms of traffic, regardless of point-of-origin and technology. Supporters of the proposal have argued that broadband deployment would be advanced if the FCC were to adopt this proposal, while detractors assert that broadband deployment would be demonstrably hurt. In this paper, we find evidence that compared to the current Byzantine intercarrier compensation system, a lower, more uniform compensation rate can promote and spur broadband deployment, especially in rural and less densely populated areas where current call termination rates are very high, by reducing arbitrage opportunities that distort investment decisions. As such, comprehensive intercarrier compensation reform would appear to make a significant contribution towards the development of a true national broadband strategy.

broadband, intercarrier compensation, national broadband strategy, universal service

Abstract:
In this article, we provide a focused economic analysis of the welfare effect of state and local regulation on communications services and, in particular, on the wireless segment of the telecommunications industry. We find that when local regulation in one jurisdiction has sufficiently large "extra-jurisdictional" effects in other locations, overall social welfare can be reduced even if state and local governments act as efficient regulators. This finding is important because it shows that the debate over the proper regulatory framework for the wireless industry need not be driven by an assessment of which set of regulators, federal or state, is more competent. Accordingly, because state and local regulation in the wireless industry has the tendency to spill across borders, our analysis suggests that society is likely better to be off with a single, national regulatory framework for wireless services.

wireless, federalism, national wireless framework

Abstract:
This article provides an empirical evaluation of a recent and important exercise in regulatory price setting in the United States. The 1996 Telecommunications Act required incumbent local phone companies to sell components of their network to rival firms at regulated prices, and the prices for these 'unbundled network elements' were based primarily on independent estimates of forward-looking economic costs. Our econometric analysis reveals that, while cost is a primary determinant of element prices, the prices also reflect foregone retail profits for incumbent firms. Statistical tests suggest that 'splitting the baby' is an accurate positivist description of public agency behavior.

Abstract:
Countries around the world are increasingly concerned as to whether the adoption of broadband technology by their respective citizens is sufficient to support economic growth and social development. Unfortunately, such concerns are often expressed in terms of where a country ranks among its peers by means of raw adoption numbers. Such raw data are often misleading and incomplete. In this Paper, we propose a different and more policy-relevant approach to adoption measurement. We develop a value-based Broadband Adoption Index (“BAI”) that compares the actual value to society that results from the adoption of broadband technology to a target level of adoption value. This target level will vary from country to country and is a function of the social value of broadband connectivity, measured as the difference in the social benefits and the costs of broadband. The BAI is specifically designed to accommodate and include the value of different connection modalities like mobile broadband into a single index, something that merely summing the number of connections cannot do. We believe that policymakers can adopt aspects of the BAI approach immediately, with particular attention to collecting and using proper information for policy decisions.

Broadband, Broadband Adoption Index, OECD, Broadband Ranking, International Ranking, Per Capita, Social Value

Abstract:
Market definition is an essential ingredient to competitive and regulatory analysis. Yet, there is significant disparity regarding the definition of the relevant geographic market for high-capacity circuits, commonly referred to as Special Access services. Given the present debate over expanding price regulation in this sector, the importance of market definition on the expected economic effects of regulation is worth evaluating. In this paper, we demonstrate that if geographic markets are “location specific” and supplied by a monopolist as the proponents of regulation claim, then price regulation reduces economic welfare in all instances. That is, even with monopoly supply, regulation offers no improvement in economic welfare, meaning the debates over the extent of competition and profit margins in such markets are irrelevant. The effect of regulation is mostly to transfer profits from sellers to buyers, so the debate appears to be largely a quibble over rents. That said, every $1 of transfer costs more than $1 to society, so regulation reduces welfare. This analysis demonstrates that the present case for regulating high-capacity services is woefully inadequate and poorly conceived.

Special Access, bilateral monopoly, market definition, Federal Communications Commission

Abstract:
In this paper, we offer a hybrid approach to merger simulation in which we allow rather extensive pre-testing to suggest the "correct", or most desirable, form for the underlying demand curves. Our application is the merger between the large mobile telephone companies Cingular and AT&T Wireless merger in 2004. While a somewhat novel approach, our findings are not radical in any way, so the econometric determination of demand forms does not appear to produce novel conclusion per se. That said, allowing the data to inform the researcher about the appropriate form of demand seems a worthwhile effort for merger simulations, data permitting.

Merger Simulation, Demand Models, Telecommunications

Abstract:
This article analyzes the effects of the popular election of a monopoly regulator on the structure of the resulting price system. Consumers are differentiated by income and vote on a regulator who implements a two-part tariff for all consumers. The structure of the winning tariff depends on the curvature properties of consumer Engel curves. When Engel curves are concave in wealth or income, the most popular tariff involves an excessive fixed charge and pricing below marginal cost. This result contributes to understanding observed anomalies in public utility pricing. Generalizations and extensions of the analysis are discussed.