Market Definition and the Economic Effects of Special Access Price Regulation

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.

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

JEL Classification: D21, D23, D42, K23, L12, L3, L14, L16, L23, L51, L96, O38