• Selected
• Entire List

Abstract:
The Telecommunications Act of 1996 sets forth extensive provisions to unbundle the local telecommunications network to encourage the development of a competitive market for local telephone. It would seem to have been an unstated premise of those statutory provisions and the Federal Communications Commission (FCC) rules interpreting them that the task of unbundling is one that should take place in a technological vacuum. Although the Telecommunications Act of 1996 ostensibly removed artificial regulatory distinctions based on the particular technology employed to produce a communications service, the administrative rulemakings and federal court litigation that have dominated the first three years of experience under the new statute have focused on the traditional wireline access network and have seemingly ignored the fact that, over the same period, wireless telecommunications has rapidly matured as a substitute for wireline access. If regulators were to acknowledge that development, the entire exercise of wireline unbundling could become irrelevant.

Wireless local telephony already provides a substitute for wireline access. It is therefore highly pertinent for a symposium on interconnection, such as this one, to consider the FCC's policies that artificially constrain the market structure for wireless telecommunications services. The Supreme Court's 1999 decision in AT&T Corp. v. Iowa Utilities Board, reversed the FCC's unbundling rules for incumbent local exchange carriers to the extent that the agency failed to establish a reasonable standard for determining whether it is necessary to unbundle a particular element and whether the failure to unbundle that element would impair and entrant's ability to compete in the provision of local telecommunications services. In this Article, we propose a general framework for evaluating competition in wireless telecommunications. Although our analysis has immediate ramifications for wireless telecommunications policies-such as spectrum caps and mergers of wireless carriers-the same analysis can shed light on the question of whether, or for how long, it is necessary to mandate the unbundling of even the copper loop, which constitutes the element of the wireline network that is considered the least susceptible to duplication by competitors. If wireless is indeed an access substitute for wireline copper loops, and if wireless thus permits the competitive supply of bundled services that are satisfactory substitutes in consumers' minds for the typical bundle of services that consumers have until now demanded in conjunction with standard wireline access, then Congress, the FCC, the state public utilities commission, and the courts must ask: Is the great experiment of mandatory unbundling of telecommunications networks worth the candle?

That consequential question emerges from the analysis that we employ to study a seemingly narrower issue of wireless telecommunications policy. By regulation, the FCC has limited to 45MHz the amount of commercial mobile radio services (CMRS) spectrum that may be licensed to a single entity within a particular geographic area. As the Commission stated in its 1998 notice of proposed rulemaking (NPRM) concerning possible relaxation of the spectrum cap, a single entity may acquire attributable interests in the licenses of broadband Personal Communications Service (PCS), cellular, and Specialized Mobile Radio (SMR) services that cumulatively do not exceed 45 MHz of spectrum within the same geographic area. We formulate, in this Article, a decision rule that would assist the Commission in deciding whether or not to retain the spectrum cap and, thereafter, in evaluating competition in wireless telecommunications generally.

We employ decision-theoretic analysis to determine whether the expected costs of retaining the 45 MHz spectrum cap exceed the expected costs of removing it. The expected costs of removing the spectrum cap are negligible. The probability of either monopolization by a single firm or collusive pricing by a group of nationwide pricing plans and because capacity is a function of both spectrum and equipment. In contrast, the expected costs of retaining the spectrum cap are substantial as wireless services evolve from mobile voice to fixed voice and data applications. The probability that a single carrier would use more than 45MHz is nontrivial, because the growth in demand due to consumers' desire for bundled service offerings and the invasion of wireless carriers into fixed communications markets will together severely burden existing networks. In short, a cost-benefit analysis demonstrates that the spectrum cap should be abolished because the expected costs of retaining the spectrum cap vastly exceed the expected costs of removing it.

The application of decision-theoretic analysis to the issue of spectrum cap policy can easily be generalized to deal with a broad range of competitive policy issues in the wireless industry. We restate the decision rule in terms that can be applied to numerous wireless policy issues. For example, regulators may have to decide whether newly merged firms should be forced to divest themselves of wireless properties in overlap territories. The issue of divestiture is treated in similar fashion to the spectrum cap analysis. Not surprisingly, many of the same factors that influence the spectrum cap analysis resurface in the merger analysis.

In Part I of this Article, we explain our decision-theoretic rule for determining whether the spectrum cap should be retained. In Part II, we estimate the expected costs of removing the cap and describe the magnitude of those costs in qualitative terms. In Part III, we present the same analysis with respect to the expected costs of retaining the cap. In Part IV, we compare the expected costs of retaining and removing the spectrum cap. In Part V, we demonstrated the general applicability of our decision-theoretic approach to competitive policy in the wireless communications industry. We conclude by noting how the increasing substitutability of wireless and wireline services is blurring the definitions of relevant market in the telecommunications industry-a development that has direct implications for whether, and how much, to mandate unbundling of the incumbent wireline network.

Abstract:
The United States has asymmetric regulation of the provision of broadband Internet access service. A cable television system operator is not regulated in its sale of cable modem service. In contrast, an incumbent local exchange carrier (ILEC) that offers digital subscriber line (DSL) service faces price regulation as well as the obligation to offer competitors the use of its broadband network on a wholesale (or, unbundled) basis so that they may offer, in the retail market, DSL services that compete with the ILEC's own retail offering to consumers.

The social costs of asymmetric regulation are by now familiar. Such regulation leads not to deregulation, but to an enduring managed competition far more complex to administer than traditional regulation of a monopoly service provider ever was. The alternative to asymmetric regulation is either symmetric regulation or symmetric freedom from regulation. Assuming that the latter alternative is preferred, what actual steps would be taken to abolish asymmetric regulation of ILEC provision of broadband Internet access?

The Federal Communications Commission (FCC) could remove asymmetric regulation that the agency itself previously imposed. The FCC could declare that broadband Internet access service is not a telecommunications service, subject to numerous regulations applicable to ILECs, but rather an information service, which is free of such regulations. Amid considerable controversy, the FCC invited public comment on such a reclassification in February 2002. Or the FCC could use its power under section 10 of the Communications Act to forbear from regulating ILEC provision of broadband Internet access.

A third, and more incremental, approach would be for the FCC to declare ILECs nondominant in the provision of advanced services, such as broadband Internet access. Non-dominant carriers are exempt from price-cap or rate-of-return regulation, as well as the obligation to file tariffs and to establish the reasonableness of those tariffs through the submission of cost data.

Much, if not all, of the economic analysis required to determine whether a carrier is nondominant also would be relevant to the FCC's decision whether to forbear from regulating a particular service or whether to reclassify the service in question as unregulated. Although the FCC did not receive its authority under section 10 to forbear from regulation until 1996, the agency has evaluated petitions for nondominance for a longer time and consequently has distilled a body of law on the subject.

In this Article, we evaluate the case against asymmetric regulation of broadband Internet access through the lens of the FCC's approach to deciding petitions for non-dominance. We examine the economic evidence relevant to whether ILECs are non-dominant in the provision of mass-market broadband services, the most familiar of which is DSL service. We use a nested-logit discrete-choice model to produce econometric estimates of the own-price elasticity of demand for DSL service and the cross-price elasticity of demand for cable modem service with respect to DSL service. Our findings suggest that demand for DSL service is price-elastic, that DSL and cable modems are in the same product market, and that DSL providers lack market power. The FCC would advance the public interest by ruling that the ILECs are non-dominant in the mass-market broadband services market.

Abstract:
This Article provides a framework for the analysis of the potential effects of the recent AOL/Time Warner merger on the markets forbroadband Internet access and broadband Internet content. We consider two anticompetitive strategies that a vertically integrated firm such as AOL Time Warner, offering both broadband transport and portal services, could in theory profitably pursue. First, an integrated provider could engage in conduit discrimination?insulating its own conduit from competition by limiting its distribution of affiliated content and services over rival platforms. Second, an integrated provider could engage in content discrimination?insulating its own affiliated content from competition by blocking or degrading the quality of outside content. After examining the competitive conditions in the broadband portal and transport markets, we evaluate the post-merger incentives of AOL Time Warner to engage in either or both forms of discrimination.

Abstract:
Network neutrality issues have been vigorously debated worldwide over the past few years. One major aim of network neutrality proponents is to prevent high-speed Internet service providers from charging content providers for priority delivery. Recently, proponents have turned their attention to the regulation of wireless networks, such as those for cellular phones, which provide increasing numbers of consumers access to Internet services. Some application providers have relied on a recent academic paper to support greater regulation of wireless operators. Although the proposals to regulate these networks use the phrase "net neutrality," the regulations they seek to impose on wireless operators have little in common with those being sought for other Internet service providers. In this article, we provide a framework for determining whether certain kinds of regulations should be imposed on the owners of wireless networks. We also consider the benefits and costs of specific proposals for the regulation of these networks. Our principal conclusion is that the costs of most of these proposals are likely to exceed the benefits.

network neutrality, regulation, wireless networks

Abstract:
By serving as a key revenue source for online content providers, online advertising has been instrumental in the development of innovative websites. Continued innovation among content providers, however, depends critically on the competitive provision of online advertising. Suppliers of online advertising provide three primary inputs - (1) advertiser tools, (2) intermediation services, and (3) publisher tools. Certain suppliers such as Google provide a platform that combines the inputs into one integrated service. In this paper, we focus on the overlapping products sold to advertisers by Google and DoubleClick - namely, the supply of advertiser tools. Because the supply of advertiser tools is highly concentrated, Google's proposed acquisition of DoubleClick raises important questions for antitrust authorities. Proponents of this acquisition argue that Google and DoubleClick do not compete - that is, buyers of search-based or contextual-based advertising (the two advertising channels in which Google participates) do not perceive graphic-based advertising (the advertising channel in which DoubleClick participates) to be substitutes. Thus, they conclude that the proposed acquisition would not lead to higher prices.

In this paper, we examine economic evidence and legal precedent to help identify the relevant antitrust product market for Google's proposed acquisition of DoubleClick. According to the Federal Trade Commission and Department of Justice Horizontal Merger Guidelines, product markets are defined by the response of buyers to relative changes in prices. To inform how buyers - in this case, online advertisers - would respond to relative changes in price across the three online advertising channels (search, contextual, and display), we analyze the results of a survey of online retailers. The survey suggests that (1) a significant share of online advertisers would substitute among the three channels in response to relative changes in prices, and (2) a significant share of DoubleClick customers would turn to Google before any other supplier in response to an increase in the price of DoubleClick's advertiser tools. In particular, the survey indicates that a combined Google-DoubleClick would likely have a greater incentive to increase the price of DoubleClick's advertiser tools relative to a stand-alone DoubleClick offering.

Google, DoubleClick, antitrust, online advertising, market definition, search, merger analysis

Abstract:
This report examines mass-market broadband access and take-up, analyzing the current and prospective level of competition and drawing implications for public policy. The report was commissioned by The Brussels Round Table, a forum for leading European telecommunication operators and equipment manufacturers, including Alcatel, BT, Deutsche Telekom, Ericsson, France Telecom, Siemens, Telefonica de Espana, and Telecom Italia.

A distinction is drawn between 'facilities-based competition', where providers are using all (or some of) their own infrastructure, and 'access-based competition', where providers depend on access to someone else's network. Amongst EU Member States, there is a general consensus that infrastructure-based competition is desirable in telecommunications and has an important role in delivering innovations such as broadband. However, public statements from national regulatory authorities (NRAs) about the benefits of infrastructure competition have not always been matched by coherent regulatory policy designed to facilitate such competition. Broadband is a new service. Typically, new services are not subject to specific regulation, owing to the risk that this would discourage investment and stifle innovation. However, from its inception, the development of broadband access has been influenced by intervention from policy makers and regulators. This intervention includes local and national government initiatives to promote broadband, and ex-ante obligations on incumbent telecom operators to provide access to their networks.

While broadband penetration is widely portrayed as being disappointingly slow, penetration is actually quite fast relative to the adoption of comparable technologies - thus questioning the claim's use as a justification for public policy intervention. Given the prevalence of intervention to date, an equally valid response is to question the effectiveness of existing regulation. Both new entrants and incumbent operators are rational agents who inevitably respond to regulatory incentives; if broadband deployment in the EU has been too slow, regulatory policy is a key area where one should look for an explanation. The current approach of NRAs to broadband is heavily influenced by the existing regulatory framework for traditional telephony services, with its emphasis on access to the local loop. The appropriateness of this approach may be questioned, given that broadband is a new service that requires new infrastructure build (even if existing networks are used) and that it can and is delivered over many different types of platforms, including cable, satellite, fixed wireless and mobile.

Against this background, this report has a number of objectives: to highlight the extent to which there is currently competition between platforms in the provision of broadband access; to explore the potential for growth in platform competition (subject to a supportive policy environment) and likely market dynamics; to assess the relative effectiveness of platform competition and access-based entry in delivering benefits for customers and reducing the need for regulation; to assess the impact of public policy on incentives to invest in infrastructure and so on the future development of platform competition; and to develop conclusions about the appropriate public policy towards broadband.

The report's authors are Dan Maldoom and Richard Marsden of DotEcon, and Gregory Sidak and Hal Singer of Criterion Economics. The report was presented in Brussels on October 15, 2003 to the BRT conference "The Future of the European Telecommunications Industry," attended by member company CEOs, members of the European Parliament, Commissioner Erkki Liikanen, and other regulators from the European Commission.

telecommunications, regulation, broadband, international regulation

Abstract:
To date, most residential customers to the Internet have used dial-up modems with a top speed of about 56.6 kbps [kilobits per second]. In the past two years broadband access has become available via cable modems offered by the local unregulated cable provider and via digital subscriber lines (DSL) offered by the local regulated telephone company (the incumbent local exchange carrier [ILEC]) and competitors who resell DSL using the ILEC facilities. Cable modems and DSL offer access speeds about 10-30 times higher than dial-up access and are termed broadband Internet access. Although Federal Communication Commission (FCC) regulation required ILEC's to sell the use of their facilities to competitors at below-cost prices, no regulation of cable companies has occurred. This outcome is curious given that cable companies have a significantly greater incentive to distort competition as a result of their unregulated monopoly profits from their cable operations. This asymmetric regulation by the FCC has led to the open-access debate. The open-access debate involves the question about whether the cable providers should be required to provide access to competing broadband Internet service providers (ISP's) or whether cable providers can use exclusive contract with their affiliated ISP's.

Here, we consider the economic incentives and actions of the providers of broadband access with respect to limiting the usage of broadband access, including the potential competitive effects for cable television, a sector of the economy where, to date, system operators have been able to exercise significant market power. We answer the question of whether the price of narrowband Internet access constrains the price of broadband Internet access. We reject the hypothesis that the price of narrowband access does not affect the price of broadband access (transport) and ISP service is not rejected. Our finding is that lower narrowband access prices do not constrain the prices charged for broadband access.

Abstract:
In this article, we examine the open access debate in the context of cable services and broadband Internet services from an antitrust framework. Our analysis is prompted by the recent AT&T-MediaOne and AOL-Time Warner mergers, which raise issues concerning the impact of integrated cable content and Internet access to residential telecommunications. Economic analysis, demographic surveys and federal antitrust guidelines each indicate that the broadband Internet access market is distinct from the narrowband Internet access market. Emerging or competing technologies, such as satellite Internet services or digital subscriber lines, cannot discipline the broadband Internet access market over the relevant time horizons. Vertical integration increases the incentives and power of cable providers to discriminate against unaffiliated broadband content, thereby substantially decreasing consumer welfare. We conclude that the recent mergers of cable content and Internet access is the most current manifestation of the classic strategy of cable providers to control alternate channels of content distribution.

Abstract:
U.S. policymakers are in the midst of an active debate over how best to accelerate the build-out of next-generation broadband networks. The U.S. economy has a significant economic stake in the outcome. It is increasingly apparent in the global economy linked together by the Internet that the future competitiveness of individual firms, and indeed entire economies, depends heavily on being able to communicate on state-of-the-art networks. Next-generation broadband networks will be significantly more expensive than earlier versions. In the United States alone, the required investment to deploy such networks ubiquitously could exceed $140 billion. This investment will not be made unless those who supply the funds for it are compensated with a rate of return commensurate with the risk. In virtually all private sector markets, firms that undertake investments have sufficient freedom to fashion the way in which they offer the products and services those investments make possible and to price them in ways that meet customer demands and optimize their returns. In the broadband Internet access market, however, advocates of proposed network neutrality ("net neutrality") regulation would restrict those who are planning to build out next-generation broadband networks from having these freedoms.

This paper examines one particular aspect of the "net neutrality" proposals: "non-discrimination" requirements relating to the provision of network quality of service (QoS) to content providers. The paper concludes that such requirements, however innocuous they may seem, actually would be detrimental to the objectives that all Americans seemingly should want — namely, the accelerated construction of next-generation networks, and benefits of lower prices, broader consumer choices, and innovations these networks would bring. The paper also concludes that under the best of circumstances, even if networks are significantly upgraded in the presence of net neutrality rules , the proposed non-discrimination provisions would provide incentives for those who would build and operate networks to offer "blended" QoS levels that are "too high" for some applications and "too low" for others. Mediocrity in broadband service is hardly an objective that policymakers in the United States should be trying to achieve.

net neutrality, broadband, regulation, network industries, quality of service, QoS

Abstract:
The current wave of telecommunications reform stands to significantly affect the provision of video over telephone networks. Several states have enacted legislation to promote the provision of video services by competitors, including telephone companies, and federal legislation regarding video franchising is also under consideration. We examine whether, on legal or policy grounds, video services provided over a telephone network should be regulated as a traditional cable service or whether a different approach is warranted. We evaluate the history of cable regulation and the services that Congress envisioned to be regulated when it first drafted legislation establishing a regulatory framework for cable television services in 1984. We then examine numerous differences between video services delivered over a telephone network and those that Congress envisioned when regulating cable television service in 1984 and in subsequent years when it revised the Cable Act of 1984. Finally, we find that municipal franchise requirements for video services provided over telephone networks would reduce consumer welfare. We estimate that, upon ubiquitous deployment by telephone companies of fiber networks to provide video service, cable customers living in areas not yet overbuilt by a wireline distributor of multi-channel video programming would enjoy the benefits of lower prices of roughly $7.15 per month, or $85.80 per year. A five-year net present value of the annualized savings would be roughly $26.52 billion (assuming a five percent discount rate). To the extent that direct broadcast satellite operators respond to lower cable prices with price reductions of their own, the net present value of the welfare benefits from telephone company entry into the market for multi-channel video programming distribution would increase by roughly 50 percent, to nearly $40 billion. We estimate that, even without considering any welfare gains owing to higher quality, these consumer welfare gains from entry exceed the potential loss in franchise fee revenues to municipalities by a factor of nearly three to one.

video over telephone, cable franchise, municipal franchise, Cable Act

Abstract:
We analyze all hostile takeovers in the past ten years where the market capitalization of the target firm exceeded $1 billion and the identity of the financial advisor of the acquirer is known. Our analysis reveals that, in the majority of cases, at least one of the advisors for the acquirer previously represented the takeover target in some way. The existence of overlapping relationships provides incentives for clients and investment banks to limit flows of private information about clients. If a firm believes that material secret information about its business that is to be revealed to an investment bank would be of interest to a competitor or potential acquirer, then that firm may obtain assurances or a written agreement about disclosure from the investment bank to ensure the confidentiality of the information. Similarly, if a bank believes that there is potential for a conflict to arise among clients relating to private information, it will often decide that it is appropriate to restrict access to that information within the investment bank by constructing a Chinese wall. Next, we test whether acquisition premia are significantly different for the acquisitions where there is a potential conflict. We find no significant differences in the means. However, we find somewhat significant differences in the variances of the two samples, which suggests that buyers with inside information may be more discriminating, both in choosing their acquisition targets and in determining the premia offered. Finally, we propose an economic test for determining whether private information has been transmitted to an acquirer, and the materiality of that private information, when an investment bank faces a potential conflict of interest, and we apply that test to a specific case involving a hostile takeover.

Conflicts of interest, investment bank, hostile takeovers, acquisition premia, Chinese Wall

Abstract:
Can the standard merger analysis of the Department of Justice's and Federal Trade Commission's Horizontal Merger Guidelines accommodate mergers in high-technology industries? In its April 2007 report to Congress, the Antitrust Modernization Commission (AMC) answered that question in the affirmative. Still, some antitrust lawyers and economists advocate exceptions to the rules for particular transactions. In the proposed XM-Sirius merger, for example, proponents argue that the Merger Guidelines be relaxed to accommodate their transaction because satellite radio is a nascent, high-technology industry characterized by “dynamic demand.” We argue that the AMC correctly refrained from recommending high-tech exceptions for defining markets in merger proceedings. Merger proponents naturally seek to expand the relevant product market as much as possible. But if alternative products are included in the relevant market without a showing of significant cross-price elasticities-that is, without evidence of buyer substitution between the two products in response to a relative change in prices-then market definition is unbounded. The XM-Sirius merger also follows a recent trend of prosecutorial inaction in merger reviews. The Antitrust Division's use of a higher standard for intervention than the incipiency standard in Section 7 of the Clayton Act increases the risk of false negatives. Finally, the XM-Sirius merger exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate postmerger rents to influential third-party intervenors. The most significant preemptive concessions were XM's and Sirius's offer to freeze the monthly subscription price at the premerger monthly rate of $12.95 and to offer a variety of new tiered program packages that XM and Sirius characterized as “à-la-carte.” These offers presumably were intended to neutralize the traditional antitrust concerns that a merger among direct competitors leads to higher prices and to win the support of certain vital constituencies. To the contrary, we argue that the offer to freeze prices could reduce welfare and that the Federal Communications Commission and the Department of Justice lack the authority to create a rate-regulated monopoly for satellite radio. Furthermore, because the “à-la-carte” offering would not hold constant other nonprice factors, consumer surplus could fall.

Abstract:
Can the standard merger analysis of the Department of Justice's and Federal Trade Commission's Horizontal Merger Guidelines accommodate mergers in high-technology industries? In its April 2007 report to Congress, the Antitrust Modernization Commission (AMC) answered that question in the affirmative. Still, some antitrust lawyers and economists advocate exceptions to the rules for particular transactions.

In the proposed XM-Sirius merger, for example, proponents argue that the Merger Guidelines be relaxed to accommodate their transaction because satellite radio is a nascent, high-technology industry characterized by dynamic demand. We argue that the AMC correctly refrained from recommending high-tech exceptions for defining markets in merger proceedings. Merger proponents naturally seek to expand the relevant product market as much as possible. But if alternative products are included in the relevant market without a showing of significant cross-price elasticities - that is, without evidence of buyer substitution between the two products in response to a relative change in prices - then market definition is unbounded.

On March 24, 2008, the Antitrust Division announced that it would not challenge the merger because, in the agency's estimation, the evidence did not show that the merger would enable the parties to profitably increase prices to satellite radio customers. The Division's use of a higher standard for intervention than the incipiency standard in section 7 of the Clayton Act increases the risk of false negatives.

Finally, the XM-Sirius merger exemplifies the use of preemptive offers of merger conditions by the merger parties to gain political favor and to allocate post-merger rents to influential third-party interveners. The most significant preemptive concessions were XM's and Sirius's offer to freeze the monthly subscription price at the pre-merger monthly rate of $12.95 and to offer a variety of new tiered program packages that XM and Sirius characterized as à-la-carte. These offers presumably were intended to neutralize the traditional antitrust concerns that a merger among direct competitors leads to higher prices and to win the support of certain vital constituencies.

To the contrary, we argue that the offer to freeze prices could reduce welfare and that the Federal Communications Commission lacks the authority to create a rate-regulated monopoly for satellite radio. Furthermore, because the à-la-carte offering would not hold constant other non-price factors, consumer surplus could fall.

Abstract:
The International Trade Commission (ITC) has gained importance in recent years because of its increasingly powerful role in adjudicating patent disputes. That little-known independent agency has the authority to bar importation of articles found to infringe a valid U.S. patent by issuing "exclusion orders." The Commission is now potentially the patent tribunal of first instance for electronic products and other products manufactured overseas. This paper examines possible biases in ITC decision making in favor of patent holders from both a positive and a normative perspective and offers suggestions for improving the efficiency of the ITC process for adjudicating complaints based on patent infringement. I provide the most comprehensive economic analysis to date of cases that arise under Section 337 of the Tariff Act of 1930.

This paper has three objectives. The first is to assess the purported benefits of the ITC's 337 process. I find that these benefits are small. The second is to assess the ITC's costs. In particular, I have sought to detect and measure any potential bias at the ITC in favor of complainants who seek to exclude allegedly infringing imported products. I find evidence of two types of bias. First, there is some evidence that the ITC is more likely to find infringement than are district courts - that is, the ITC appears to be more likely than are district courts to find an accused infringer to be liable. Second, a subtle yet important bias in favor of complainants relates to the ITC's practice of granting nearly automatic injunctive relief once it has found infringement. Yet as the Supreme Court has recently recognized, awarding nearly automatic injunctive relief in patent cases is not always in the public interest. Finally, I propose either removing jurisdiction from the ITC in most patent cases or imposing the same standard for issuing injunctions as applies in the district courts as two possible methods of reform that would reduce the social costs of ITC patent litigation.

International Trade Commission, ITC, Section 337, patents, injunctive relief, patent litigation

Abstract:
Because of the overwhelming, positive response to the iPhone as compared to other smart phones, exclusive agreements between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. In this paper, we document the myriad revolutions that have occurred in the mobile handset market over the past twenty years. Although casual observers have often claimed that a particular innovation was here to stay, they commonly are proven wrong by unforeseen developments in this fast-changing marketplace. We argue that exclusive agreements can play an important role in helping to ensure that another must-have device will soon come along that will supplant the iPhone, and generate large benefits for consumers. These agreements, which encourage risk taking, increase choice, and frequently lower prices, should be applauded by the government. In contrast, government regulation that would require forced sharing of a successful break-through technology is likely to stifle innovation and hurt consumer welfare.

Abstract:
Fifteen scholars on auctions and telecommunications regulation urge the FCC to cancel bids made in, or permit winning bidders to opt out of, the reauction of the NextWave licenses in Auction 35.

For auctions to function efficiently, buyers and sellers must follow basic rules, including the rule that a seller deliver in a timely manner what the winning bidder has purchased. This rule has not been applied in Auction 35. The FCC auctioned something that it did not have - immediate access to the spectrum for the winning bidders. Thus, if the FCC forces the winning bidders to pay, they will sue the agency for forcing them to pay for something that they did not receive. Alternatively, their shareholders will sue the companies. Meanwhile, wireless carriers have invested in less efficient technologies to meet capacity needs.

The FCC has said that its current policy toward Auction 35 seeks to "protect the integrity" of the spectrum auction process. The opposite is already occurring. The FCC increases uncertainty in the wireless market if it holds carriers accountable for winning bids for licenses that the agency cannot deliver. Bidders will discount their future bids accordingly, and auction revenues will fall. That outcome does not benefit consumers, taxpayers, workers, or shareholders.

Abstract:
An expanding economics literature has examined the theoretical linkages between mandatory unbundling in the telecommunications sector and the incentives to invest in facilities by both incumbent local carriers and competitive carriers. Recent empirical evidence that substantiates the theory has emerged. That literature documents CLECs' reluctance to make facilities-based investments instead of availing themselves of incumbents' UNEs at low regulated prices that are based on total element long-run incremental costs (TELRIC). By examining the variation in facilities-based investment in loops across U.S. states, we find that an increase in the UNE loop rate increases CLEC facilities based lines for any reasonable own-price elasticity of demand for CLEC service.

telecommunications, investment, unbundling, CLEC, UNE-P

Abstract:
In this report, we reply to the comments of Andzeg Skrzypacz and Robert Wilson on behalf of Frontline Wireless in the Federal Communications Commission's 700 MHz Auction proceeding. Frontline's economists primarily advocate two restrictions on the auction that would significantly limit the number of bidders for the E Block license, one of several blocks for sale in the auction. One restriction would exclude all incumbent wireless operators and cable operators from participating in the E Block auction. A second restriction would require that the winning bidder employ a wholesale-only business model.

We examine the likely costs and benefits of these two restrictions in some detail. We argue that the benefits of these restrictions would likely fall short of the costs, so they should not be adopted. In performing our cost-benefit analysis, we point out that Skrzypacz and Wilson failed to consider the unintended consequences of recent efforts to restrict entry in U.S. wireless auctions (the NextWave story) and to impose mandatory open access obligations on U.S. wireline operators (the CLEC story).

To justify their first restriction, Frontline's economists assert that the only motivation for the incumbents' participation in the E Block would be to foreclose other wireless entrants. We explain that there are procompetitive reasons for the incumbent carriers to participate in the E Block auction. We also explain that Frontline's economists have failed to demonstrate that incumbent carriers have both the ability and incentive to warehouse spectrum.

To justify their second restriction, Frontline's economists assert that the wireless industry's market structure is inefficient due to "vertical integration" of incumbent carriers across wholesale and retail functions. According to Skrzypacz and Wilson, Frontline's proposed wholesale-only restriction would permit the wireless industry to evolve into an allegedly more efficient state of structural separation, as incumbent carriers would be forced to embrace a wholesale business model. We demonstrate that the authors fail to present a compelling case as to why their proposed business model would likely result in benefits in excess of costs.

We explain that the proposed restrictions on the auction would likely insulate firms, such as Frontline, from competition in the auction. Such insulation may result in a windfall for Frontline, but it is unlikely to be in the best interests of the American consumer. The FCC should send a clear signal to industry participants that it rejects any form of rent-seeking behavior by rejecting Frontline's proposal.

Frontline, 700 MHz, auction, spectrum, FCC

Abstract:
In April 2004, the World Trade Organization (WTO) assumed a new role as a highly specialized, global regulator of domestic telecommunications policy. In response to a complaint filed by the United States, a WTO arbitration panel found that Mexico had violated its commitments under the Annex on Telecommunications to the General Agreement on Trade in Services (GATS) by failing, among other things, to ensure that Telmex, Mexico's largest supplier of basic telecommunications services, provide interconnection to U.S. telecommunications carriers at international settlement rates that were cost-oriented. The WTO panel deemed long-run average-incremental cost (LRAIC) to be the appropriate cost standard for setting settlement rates. Mexico thus became obliged to change its domestic telecommunications regulations or face trade sanctions.

The decision is the first WTO arbitration to deal solely with trade in services under GATS. This article shows that both the U.S. complaint against Mexico and the WTO decision misunderstood or ignored critical economic facts and principles. Both conflated international settlement rates and domestic interconnection pricing, and both failed to recognize the factors that would justify Mexico's permitting Telmex to charge a settlement rate exceeding LRAIC. Moreover, the U.S. government failed to understand that U.S. long-distance carriers were not passing reductions in Mexico's international settlement rate on to their U.S. customers. Finally, both the U.S. government and the WTO incorrectly defined the relevant market and incorrectly evaluated market power.

The relevant economic question should have been whether Telmex had market power in point-to-point international telecommunications services between the United States and Mexico. The WTO decision reveals a startling low level of economic sophistication in its analysis of inescapably economic questions. Given the high level of economic sophistication that is now standard in competition law and sector-specific regulation around the world, the WTO has made a poor start in its implementation of the GATS arbitration process.

Telecommunications, trade, world trade organization, WTO, settlement rates, USTR, interconnection, Telmex, resale, LRAIC

Abstract:
Net neutrality represents the prohibition of any contracting for enhanced service or guaranteed quality of service (QoS) between a broadband service provider and an Internet content provider. Such a prohibition would unwind existing contracts for QoS between broadband service providers and content providers. The anticompetitive harms that would be allegedly spared from such a prohibition pale in comparison to the efficiencies made possible by such contracting.

net neutrality, hal j. singer, non-discrimination, enhanced service, guaranteed quality of servicer, QoS, broadband service provider, internet content provider, efficiency, prohibition, legislation, internet, non-discrminiation provisions,

Abstract:
Vertically integrated DSL providers have been accused of engaging in a price squeeze to foreclose unaffiliated Internet service providers (ISPs). A price squeeze is a special case of a refusal to deal, in which the access price is set so high as to prevent the downstream provider from covering its incremental costs, thereby foreclosing downstream competition. In this paper, we assess the merits of a generic price squeeze allegation made against a vertically integrated telecommunications company - namely, a DSL provider. We review the role of regulation in promoting competition by facilitating entry into broadband services by unintegrated ISPs. Next, we discuss the earlier generation of ISPs' contribution to consumer value, and ask whether they can continue to do so in a broadband world. We conclude that the social cost associated with the elimination of ISPs (and the incremental competition they inject at the retail level of broadband service) is negligible. Finally, we review the price squeeze allegations. Using a traditional antitrust paradigm, we identify the conditions under which such a price squeeze would harm consumer welfare. We conclude that while the price squeeze test yields information about the welfare of an equally efficient retailer, it yields little information about consumer welfare. We end by discussing the relationship between price squeeze and cross-subsidies.

price squeeze, Internet, DSL, broadband, ISPs

Abstract:
Although the Department of Justice and the Federal Trade Commission (FTC) review proposed mergers, in mergers involving communications businesses the Federal Communications Commission (FCC) decides whether it would serve the public interest for the acquired firm to transfer its operating licenses to the acquiring firm. This public-interest discretion has become problematic because the FCC has repeatedly set conditions for merger approval that satisfy private pressure groups with economic or social agendas, yet are irrelevant to defending consumers from the consequences of increased market power.

A current example of this phenomenon is the proposed merger of XM and Sirius, the only two satellite radio companies holding FCC licenses for radio spectrum. The firms have an incentive to accept costly new regulation-for example, a requirement that the combined systems set aside channels for educational programming or offer programming on an à-la-carte basis-as the price of merger approval. Such concessions, however, are not relevant to the antitrust laws, where the concern is whether the merger will create monopoly power. Redistributing income to influential political constituencies does nothing to answer the question of whether the merger will harm consumers, who form the constituency that should matter most to the FCC.

Congress should remove the FCC's power to impose conduct remedies as a condition of approving a merger. Alternatively, Congress should require that the Tunney Act apply to conduct remedies imposed by the FCC in mergers, such that a federal district court would independently review whether merger conditions adequately addressed the specific harm to competition that the FCC alleged in the merger order.

Abstract:
There is a large empirical literature that investigates the effects of unbundling requirements on broadband operators' incentives to invest in infrastructure. To date, that literature has generally relied on industry-wide data as an indicator of how the representative operator reacts to the imposition of mandatory unbundling. In this paper, we present original findings on how specific firms reacted to the removal of an unbundling obligation - that is, an act of regulatory forbearance - either for an existing access technology or for a new access technology. We rely on three case studies to evaluate the impact of regulatory forbearance on specific incumbents and entrants that were directly affected by the regulator's decision. Our findings from the first case study appear to undermine the so-called stepping stone justification for unbundling an existing access technology (for example, the copper loop). In particular, there is a large discontinuity in the investment by entrants around the date of forbearance, in contrast to the steady movement up the ladder of investment predicted by the stepping stone hypothesis. Such a discontinuity suggests that either (1) the regulator failed to signal its deregulatory intentions to entrants, or (2) that the signal was clear but the entrant did not react according to the theory. We also find that incumbent investment increases significantly in response to forbearance from regulating a new access technology (for example, fiber loops). When forbearing from regulating an existing access technology, regulators can signal their future intentions to entrants by slowly increasing the regulated wholesale rate. In the case of forbearing from regulating a new technology, however, there is no equivalent mechanism by which regulators can signal their deregulatory intentions to incumbents. Because a regulator cannot credibly signal its commitment to industry participants, and because such a commitment is critical to the practical success of the stepping stone theory, the best policy for maximizing investment is to accelerate the date of forbearance for existing and new access technologies.

unbundling, broadband, forbearance

Abstract:
A large "cluster" of contiguous cable systems might deter entry or induce exit by overbuilders. To date, there is little empirical evidence relating an overbuilder's entry decision to the size of the incumbent multi-system operator's (MSO's) footprint. By examining the variation in overbuild activity across Census block groups (CBGs) in Michigan, I find that an increase in the size of the cluster significantly decreases the probability of overbuild activity when controlling for all other factors that might influence the entry decision. An application of the model predicts that, by forming even larger clusters of geographically contiguous clusters of cable systems, the 2002 merger between AT&T and Comcast will significantly decrease the likelihood of entry by overbuilders in Michigan. To the extent that overbuilders constrain the pricing decision of incumbent MSOs, clustering might yield higher prices for cable television consumers.

Abstract:
This paper argues that a cable operator with sufficient market power in the downstream multi-channel video programming distribution (MVPD) market can deny access to unaffiliated programmers, resulting in an upstream programming rival's exit or impaired dynamic efficiency. Further, market dominance by cable operators may harm consumers of video programming through higher prices and less choice in the downstream MVPD market. The reason is that as unaffiliated video programming becomes affiliated programming, the latter is then withheld from rival MVPDs. This analysis is then applied to the recent acquisition of Adelphia by Comcast and Time Warner.

Vertical foreclosure, video programming markets, cable operators, multi-channel video programming distribution, unaffiliated video programming, Adelphia, Comcast, TimeWarner

Abstract:
Tax increment financing (TIF) is an increasingly common form of economic development incentive used by local governments to encourage private sector investment. In this study, we focus attention on a specific TIF proposal in the City of Dallas. In the empirical section, we present a regression analysis of retail spending across North Texas cities. We estimate the extent to which the growth in retail sales in a given city can be explained by the growth in retail sales in surrounding cities. Next, we solve for the "critical" cannibalization rate for retail sales within the City of Dallas such that a proposed TIF would be in the City's economic interest. In particular, we find that for any cannibalization rate less than 93 percent, the City of Dallas would benefit from the proposed TIF. Next, we estimate the cannibalization rate for various geographic markets containing Dallas. We find that the cannibalization rate for a geographic market that contains the City of Dallas is 34 percent - that is, 66 percent of all new sales in that area are incremental to that area. Because the cannibalization rate for Dallas must be less than the cannibalization rate for a larger geographic market that contains Dallas, and because the estimated 34 percent cannibalization rate is less than the critical level of 93 percent, the City of Dallas should endorse the proposed TIF from the standpoint of revenue maximization. We also present a case study of a TIF used by the neighboring city of Frisco, with a special emphasis on the economic effect of that TIF on the City of Dallas.

Tax increment financing, tax incentives, jurisdictional competition, fiscal federalism, state and local taxation

Abstract:
M2Z Networks, Inc. and its consulting economist, Professor Simon Wilkie, have asked the Federal Communications Commission (FCC), when allocating the third block of the Advanced Wireless Services (AWS) spectrum, to abandon the agency's established auction process and instead award that spectrum directly to M2Z. They argue that the FCC should embrace M2Z's business plan because, relative to some alternative use of the spectrum that would emerge from an unrestricted auction, M2Z's plan would generate significant benefits for broadband consumers. These putative benefits include (1) providing a basic, "free" mobile broadband service to new subscribers, and (2) reducing the price of broadband for existing subscribers. If, contrary to M2Z's proposal, the FCC does auction the AWS-3 spectrum, M2Z urges the FCC to impose requirements on the winning bidder that mirror M2Z's business plan. This paper analyzes the benefits and costs of M2Z's proposal by comparing it with an allocation based on an unrestricted auction of spectrum rights. We find that M2Z's proposal would likely cause substantial economic losses in both static and dynamic economic efficiency.

Abstract:
In December 2003, the National Highway Traffic Safety Administration (NHTSA) issued an Advanced Notice of Proposed Rulemaking that sought comments on suggested changes to the corporate average fuel economy (CAFE) program. Among other regulatory concepts, NHTSA suggested that future CAFE standards should be based on the curb weight of trucks up to 5,000 pounds, and should encourage reductions in the curb weights of trucks over 5,000 pounds, by holding truck models in the currently regulated fleet over 5,000 pounds to standards that would not be based on curb weight. This paper analyzes the changes that manufacturers could make to bring all light trucks in the currently regulated fleet with a curb weight of 5,000 pounds or more into compliance with a standard of 18 miles per gallon (mpg), intended to encourage the downweighting of those trucks. The analysis reaches two important empirical conclusions: (1) the attributes of model year (MY) 2002 light trucks over 5,000 pounds that would not meet an 18 mpg standard are significantly different from the attributes of light trucks in the same weight class that would meet an 18 mpg standard; (2) consumers value highly the attributes that would be sacrificed if they were forced to choose from those models that satisfy the standard. We estimate the reduction in consumer welfare that would be associated with two possible reactions of automobiles manufacturers to the proposed change in the CAFE program.

If manufacturers react by eliminating light trucks in the currently regulated fleet with weights over 5,000 pounds that do not comply with the new standard ("Scenario 1"), forcing consumers to choose from only those vehicles of the same weight that achieve the standard today, the associated reduction in consumer welfare would likely be between $432 and $648 million per year. Alternatively, if manufacturers react by reducing the weight of the vehicles in that fleet to comply with the new standard ("Scenario 2A") for those models that do not require a significant change in the weight, the associated reduction in consumer welfare would be between $636 and $748 million per year. If instead manufacturers react by reducing the weight of the vehicles in that fleet to comply with the new standard ("Scenario 2B") regardless of the required change in the weight of the light truck, the associated reduction in consumer welfare would be $1.516 billion per year.

Setting aside any methodological problems with NHTSA's safety model, if each of the 36 models that failed the new standard were to comply with the standard solely through weight reduction ("Scenario 2B"), then roughly 6.0 lives per year would be saved according to a preliminary safety analysis published by NHTSA in September 2003. Assuming that society values a life saved between $3 and $4 million, the present discounted value of expected benefits under Scenario 2B is between $179 and $238 million in 2002. If only those models that did not require a significant reduction in weight were to reduce their weights (Scenario 2A), then roughly one-quarter of a life per year would be saved. The present discounted value of the associated safety benefits would be between $8 and $11 million. We conclude that the reduction in consumer welfare associated with each of these scenarios vastly exceeds the purported benefits of this reform to the structure of the light truck CAFE standards. Therefore, the ratio of consumer welfare reductions to safety benefits is in the range of 6 to 95. Even in Scenarios 2A and 2B, in which the regulated firms react in a manner consistent with that envisioned by the Notice, the proposed reform would greatly decrease welfare. Hence, consumer welfare considerations require the rejection of this CAFE reform.

CAFE, NHTSA, fuel economy, light trucks, curb weight, miles per gallon

Abstract:
Many cable television operators routinely refuse to run local DSL advertising on their cable systems. Given that such conduct reduces the advertising profits of cable companies, a plausible purpose for such discriminatory refusals to deal is to limit their cable customers' information about competitive alternatives to their cable modem services. By banning local DSL advertisements placed on cable television, a cable television operator forecloses equally efficient rivals (DSL providers) in the broadband Internet access market from the most efficient form of advertising a broadband product (television advertising), as I prove here, and thereby impairs rivals' efficiency. To the extent that DSL providers cannot compete as effectively as they would in the absence of the ban, the ban allows cable television operators to raise the price of cable modem service and thereby reduce consumer welfare. Using a traditional antitrust analysis, I present evidence that local television advertising can be a separate product market (when it comes to marketing DSL), and that cable television providers have market power in that advertising market. I also present evidence that local television advertising on cable networks is the most efficient form of advertising for DSL providers. The potential anticompetitive effect of cable's ban on DSL advertising is to relegate DSL advertising to less efficient marketing channels, thereby allowing cable operators to charge higher prices for cable modem service. Such conduct thus raises obvious antitrust issues.

cable television, DSL, advertising, refusal to deal, antitrust

Abstract:
We assess the economic harms that would accrue if Canada were to adopt asymmetric rules of foreign ownership for incumbent carriers and entrants. We begin by reviewing the U.S. attempt to stimulate competition in local telecommunications markets through an analogous form of asymmetrical regulation. Despite the best of intentions, United States regulators have not been able to stimulate meaningful local competition through such asymmetrical regulation. Moreover, the resultant easy access to capital created wasteful investment by the entrants. Second, licensing restrictions on foreign carriers in the U.S. reflects another form of asymmetric regulation because they apply only to wireless licenses, not wireline operations. This licensing process confers substantial discretionary authority on the FCC, which has allowed the process to become highly politicized. Finally, asymmetric rules for broadband services have cemented the position of cable modem providers vis-a-vis DSL providers.

The U.S. experience highlights several issues that may be relevant for Industry Canada as it assesses the effect of changes in foreign ownership rules on competition in telecommunications. In particular, the investment of more than $40 billion by entrants in the U.S. local telecommunications markets has been almost completely squandered. This asymmetric regulation did not succeed in attracting entrants that would have a measurable effect on the retail price of telecommunications services. Given the nature of demand for and supply of telecommunications services, competition is more likely to develop across different platforms - cable, wireline, and wireless - not among small niche players lured into the marketplace by regulators.

With the lessons of the U.S. regulatory experience in mind, we review two specific Canadian proposals regarding foreign investment rules: tiering and licensing. We conclude that a tiering approach would harm competition and infrastructure investment because it would reduce the incentives of incumbent carriers to invest in network upgrades or new services and potentially aggravate the problem of excess capacity that plagues the telecommunications industry. A licensing approach for foreign investment restrictions should also be rejected. Licensing would impose a further layer of regulation on the marketplace, reduce foreign investment, and expose foreign carriers to political pressures. The Canadian agencies should not follow their southern neighbors down the road to despair.

Canada, telecommunications, foreign investment, tiering, licensing, asymmetric regulation

Abstract:
We examine the impact of an incumbent carrier's participation in an auction set-aside for non-incumbents that was conducted simultaneously with an auction that was open to all carriers. We estimate the extent to which prices in the closed auction were inflated by the participation of incumbents. We also estimate what prices would have been in the open auction had incumbents been excluded from bidding in the closed. We find that an incumbent's participation in the closed auction through a front, Alaska Native, enabled it to win more licenses at lower prices in FCC Auction 35. In contrast, non-incumbents won fewer licenses and paid more for what they won. If the FCC's goal is to promote competition in the wireless industry, we suggest an alternative definition of control that is grounded in the antitrust literature.

auctions, damages, econometric, spectrum, FCC

Abstract:
In July 2009, the Obama Administration proposed legislation that would create a Consumer Financial Protection Agency. Among other items, the proposed legislation would eliminate federal preemption of state consumer protection laws, which would encourage states to reintroduce a scattering of local rules and regulations. The legislation is an outgrowth of a recent - though largely non-economic - literature linking preemption to all that ails the U.S. banking industry, including the subprime mortgage crisis. Since the National Bank Act of 1864, U.S. banks and their customers have benefited enormously from the preemption of state and local rules. Uniform, national regulatory standards have allowed banks to issue a consistent set of terms for mortgages, credit cards, and business loans. Literature focusing on the politics of preemption, rather than on the economic effects, largely misses the efficiency gains from standardizing regulatory policy. By encouraging competition between banks, uniform standards lead to lower costs of credit and greater capital availability. In this paper, we examine from an economic perspective why uniform national standards were originally needed in the U.S. banking industry, and continue to be so. The most significant preemption decisions made by the Office of the Comptroller of the Currency over the last two decades have enhanced competition among banks and thwarted price controls, increasing overall economic efficiency. Preemption has been used to open markets, expand access to banking services such as ATMs, democratize credit, and simplify regulatory compliance. Accordingly, placing barriers to preemption would raise bank operating costs and restrict bank operations, hurt customers, and suppress economic growth.

banking, consumer protection, preemption, subprime mortgage crisis, Consumer Financial Protection Agency, CFPA

Abstract:
In the last several years, narrowband "dial-up" Internet Service Providers have been decimated by consumer migration to higher-speed broadband services. Narrowband ISPs are now pressuring the Federal Communications Commission and other telecommunications regulators to implement policies that would breathe life back into their businesses. But the consumer welfare justifications that they offer for government intervention are dubious.

Internet Service Providers, ISPs, broadband, narrowband, FCC, Federal Communications Commission, telecommunications, telecommunications regulators, telecommunication policy, telecommunication policies

Abstract:
In this article, we examine the benefits that accrue to policyholders and incumbent insurers from an active secondary market for life insurance policies. We begin by examining the benefits of secondary markets in the home mortgage and catastrophic risk insurance industries as points of comparison for the benefits of the secondary market for life insurance policies. Next, we outline the economic theory of a life insurance market both before and after the introduction of a secondary market. Although competition among insurance companies in the primary market leads to reasonably competitive surrender values given normal health, surrender values based on normal health do not appropriately compensate individuals with impaired life expectancies for the resulting appreciation of their policies. Without an active secondary market, the equilibrium quantity of impaired policies that is surrendered is inefficiently low. Incumbent insurance carriers have no incentive to eliminate this inefficiency because they hold monopsony power over the repurchase of impaired policies. Viatical and life settlement firms erode this monopsony power. Finally, we examine the benefits of an active secondary market for life insurance policies to policyholders and incumbent insurers in the primary market. The magnitude of the benefits is positively correlated to the quantity of coverage sold to life settlement firms and to the improvement in the terms of accelerated death benefits offered by incumbent carriers. The emergence of the secondary market for life insurance policies has been pro-competitive and pro-consumer. Lawmakers should therefore design regulations that encourage, rather than dissuade, participation and investment in this secondary market.

Life insurance, secondary market, life settlement, viatical

Abstract:
In an earlier article, we presented a case study of local loop unbundling (LLU) in the Republic of Ireland in 2001. We explained how the predecessor regulatory body to the Irish Commission for Communications Regulation (Comreg) could select the least arbitrary interim access rate. This article is an epilogue to the unfolding LLU experiment in Ireland. We assess the approach advocated by the Industry Advisory Group (IAG), which was appointed by Comreg to resolve the access-pricing dispute between the incumbent, eircom, and the regulator. The IAG does not provide factual support for its assertions that the low digital subscriber line (DSL) penetration and subscription rates in Ireland result from market failure - that is, that eircom is restricting supply of DSL service. Nor does the IAG provide factual support for its presumption that DSL service represents a distinct product market under standard tools for competitive analysis. Assuming, counterfactually, that the factual basis for such regulatory intervention exists, we articulate the problem confronting Comreg: to estimate the ratio of a variable for which Comreg believes it has very good information (eircom's long-run average incremental cost, or "LRAIC"). The IAG's solution cannot inform Comreg of this relationship. The IAG suggests that, after arbitrarily excluding the three countries with the highest LRAICs, eircom should make its unbundled loops available at a price within the range of the remaining LRAICs in the truncated sample. A more principled approach would be to estimate the ratio of historical costs to LRAIC from other countries and then to apply that ratio to eircom's historical costs. Alternatively, one would estimate in a regression model the relationship between LRAIC and the economic and demographic factors that influence LRAIC.

Abstract:
During a period of substantial regulatory change, as in the case of network unbundling in telecommunications, regulators often face the challenge of setting interim rates for services. How, in the face of inherently imperfect information and the need to proceed according to what is invariably an expeditious plan of deregulation or industry restructuring, can the regulator select an interim rate that is the least arbitrary? In this Article, we answer that questions using, as a case study, local loop unbundling (LLU) in the Republic of Ireland in 2001. We analyze the interim prices set by the Office of the Director of Telecommunications Regulation (ODTR) for access by competitors to the local network of the incumbent carrier, eircom. The ODTR's interim prices are based on a simple average of the prices in ten European Union countries for the same service. That methodology is flawed because, with minimal effort, the regulator could have used publicly available data to produce a considerably less arbitrary interim rate. A simple average does not produce good in-sample predictions when the sample variance is large relative to the sample mean - as is the case with the prices of unbundled loops in the EU countries. Using a simple multiple regression model, we find that the ODTR's methodology ignores relevant information, such as population, wage rate, population density, and the degree of urbanization, which, in a sample of the fifty U.S. states and ten European countries, explains roughly 25 percent of the cross-sectional variation in unbundled loop prices over and above that which can be explained by the sample mean alone. The regression model would produce an interim rate that is 42 percent higher than the rate set by the ODTR. Finally, we observe that interim rates that impose artificially low pricing of unbundled network elements will discourage facilities-based investment, to the long-run detriment of consumers.

telecommunications, unbundling, Ireland

Abstract:
Network neutrality issues have been vigorously debated worldwide over the past few years. One major aim of network neutrality proponents is to prevent high-speed Internet service providers from charging content providers for priority delivery. Recently, proponents have turned their attention to the regulation of wireless networks, such as those for cellular phones, which provide increasing numbers of consumers with access to Internet services. Some application providers have relied on a recent academic paper to support greater regulation of wireless operators. Although the proposals to regulate these networks use the phrase net neutrality, the regulations they seek to impose on wireless operators have little in common with those being sought for other Internet service providers. In this article, we provide a framework for determining whether certain kinds of regulations should be imposed on the owners of wireless networks. We also consider the benefits and costs of specific proposals for the regulation of these networks. Our principal conclusion is that the costs of most of these proposals are likely to exceed the benefits.