Toward a Unified Theory of Access to Local Telephone Systems

Abstract:     
One of the most distinctive developments in telecommunications policy over the past few decades has been the increasingly broad array of access requirements regulatory authorities have imposed on local telephone providers. In so doing, policymakers did not fully consider whether the justifications for regulating telecommunications remained valid. They also allowed each access regime to be governed by its own pricing methodology and set access prices in a way that treated each network component as if it existed in isolation. The result was a regulatory regime that was internally inconsistent, vulnerable to regulatory arbitrage, and unable to capture the interactions among network elements that give networks their distinctive character. In this Article, Professors Daniel Spulber and Christopher Yoo trace the development of these access regimes and evaluate the extent to which the emergence of competition among local telephone providers has undercut the rationales traditionally invoked to justify regulating local telephone networks (e.g., natural monopoly, network economic effects, vertical exclusion, and ruinous competition). They then apply a five-part framework for classifying different types of access that models the interactions among different network components. This framework demonstrates the impact of different types of access on network configuration, capacity, reliability, and cost. The framework also demonstrates how mandated access can increase transaction costs by forcing local telephone providers to externalize functions that would be more efficiently provided within the boundaries of the firm.

Keywords: Antitrust, telecommunications, access regulation, graph theory, natural monopoly, network economic effects, vertical exclusion, managed competition, transaction costs, complex systems

JEL Classifications: K21, K23, L96

Accepted Paper Series