Changing Industry Structure: The Economics of Entry and Price Competition
36 Pages Posted: 8 Sep 2004
Date Written: April 2001
The Telecommunications Act of 1996 (the "1996 Act"), by stressing the reduction or elimination of entry barriers that prevent the fragmentation of market structure and an increase in the number of competitors, established competition and deregulation as the foundation for public policy towards the telecommunications and commercial broadcasting industries. By lowering barriers to entry, telecommunications markets should be expected to grow as new firms expand industry capacity and broaden the scope of consumer choice. Presumably, market concentration will decline as entry continues, eventually producing sufficient fragmentation that competitive rivalry will obviate the continuing need for regulation. Suppose, however, that the ongoing process of competitive entry becomes truncated and market concentration fails to continue falling even if market size continues to grow so that concentration appears to reach a lower bound. There is some evidence suggesting that such a lower bound may, in fact, exist in local telecommunications markets, notwithstanding the statutory provisions of the 1996 Act reducing barriers to entry. This Policy Paper draws from the analyses of competition developed over the last decade or so that offers new insights about the market size-market concentration relationship. The Policy Paper proposes that this new economic thinking is directly applicable to understanding the evolution of entry and competition in telecommunications markets and the growing concentration in commercial broadcasting markets following adoption of the 1996 Act. Moreover, this new economic thinking, unlike the more standard analyses of market structure and competition, provides guidance for public policy towards both telecommunications and broadcast markets.
Keywords: Telecommunications, Competition, Market Structure
JEL Classification: K23, K21, L10, L5, L50, L51, L52, L96
Suggested Citation: Suggested Citation