Economic Case for Voluntary Structural Separation
37 Pages Posted: 9 May 2012
Date Written: September 15, 2003
In recent years, there has been much interest and discussion about the desirability of mandating structural separation of incumbent local exchange carriers into separate regulated and unregulated businesses (Crandall and Sidak, 2002 4 ; Hall and Lehr, 2002 5 ; OECD, 20016 ). While it is conceivable that further advances in technology and business models will enable sustainable and adequate local infrastructure competition to eliminate any question of a bottleneck for last- mile access facilities, it is also conceivable (even probable) that next generation broadband infrastructure (e.g., fiber to the home) will once again revive concerns about last-mile monopolies. This paper takes a step back from the policy question of the desirability of mandatory structural remedies to focus on the private incentives for providers of last- mile facilities to structurally separate voluntarily in a broadband future. We take as a starting point a hypothetical world in which the provider of broadband access services would be required to provide regulated wholesale access to its local network, while at the same time continuing to compete in downstream retail markets that might otherwise be unregulated. The marriage of regulated and unregulated services within a single firm has been uncomfortable – at best – for regulators, managers, and investors. The standard economic analysis of structural separation focuses on the coordination, scale, or scope economies that would be foregone by divesting the regulated and unregulated activities, and compares those to prospective welfare gains from implementing more effective open access to bottleneck facilities.
While this analysis provides a useful starting point, it is incomplete. Economic, organization, and finance theory suggest a number of additional reasons why a firm operating in mixed markets might choose to separate its regulated and unregulated activities. In this paper, we apply these arguments to expand understanding of the conditions under which a firm would seek to structurally separate voluntarily.
We conclude that much of the current resistance by incumbents to structural separation is based on their belief that the open access regime adopted by the Telecommunications Act of 1996 is temporary. In a future with effective open access rules, incumbents may find it advantageous to structurally separate voluntarily.
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