Toward a Unified Theory of Access to Local Telephone Networks Christopher S. Yoo University of Pennsylvania Law School April 18, 2008

The Inadequacy of Current Theory The classic approach to network regulation Regulates price of outputs to customers Bases rates on cost Needs no theory of network architecture The shift from rate regulation to access regulation Regulates price of inputs to competitors Still bases regulated rates on direct costs Requires a theory of network configuration April 18, 2008 Yoo - Breakup of AT&T

A Theory of Network Configuration Based on principles of “graph theory” Models interactions among network components Surpasses literature on network economic effects Takes into account more than network size Provides insights into optimal network configuration, cost, capacity, and reliability Reveals impact of access regulation April 18, 2008 Yoo - Breakup of AT&T

Limitations of the Current, Cost-Based Approach to Regulation In effect treats affected elements as if they existed in a vacuum Overlooks the fact that access can have implications for the network as a whole If capacity is slack, may overcompensate If capacity is saturated, may undercompensate May alter optimal configuration May degrade reliability/quality of service in unpredictable ways April 18, 2008 Yoo - Breakup of AT&T

Limitations of the Current, Cost-Based Approach to Access Regulation April 18, 2008 Yoo - Breakup of AT&T

Limitations of the Current, Cost-Based Approach to Access Regulation April 18, 2008 Yoo - Breakup of AT&T

Limitations of the Current, Cost-Based Approach to Access Regulation April 18, 2008 Yoo - Breakup of AT&T

Limitations of the Current, Cost-Based Approach to Access Regulation April 18, 2008 Yoo - Breakup of AT&T

Limitations of the Current, Cost-Based Approach to Access Regulation April 18, 2008 Yoo - Breakup of AT&T

Limitations of the Current, Cost-Based Approach to Access Regulation April 18, 2008 Yoo - Breakup of AT&T

Limitations of the Current, Cost-Based Approach to Access Regulation April 18, 2008 Yoo - Breakup of AT&T

Max Flow/Min Cut Theorem d 11 1 38 8 10 2 7 e 8 2 7 1 26 1 s t c b 24 2 18 C A B f D April 18, 2008 Yoo - Breakup of AT&T

Toward a General Theory of Network Configuration Provides theory of efficient network design Relative cost of switching and linking Magnitude & variability of network demand Economies of scale from aggregating traffic Tradeoff between cost and reliability Offers formal method for determining rates that captures interactions among network elements Calculation would be fact and information intensive Results are very sensitive to the model’s assumptions April 18, 2008 Yoo - Breakup of AT&T

Toward a More Modest Theory of Network Configuration Distinguishes among five different types of access Provides a basis for analyzing effects on: Capacity and configuration Transaction costs April 18, 2008 Yoo - Breakup of AT&T

The Five Different Types of Access Interconnection access (reciprocal connection of networks I and II I Retail access (final customer A) A B II Wholesale access (wholesaler B and final customer A) Platform access (for final customer A and supplier of complements B) A B Unbundled access (for competitor C) C April 18, 2008 Yoo - Breakup of AT&T

The Impact of Different Types of Access Different effect on demand, which in turn affects optimal configuration and reliability Possible introduction of flows in core of network Differences in transaction costs/alteration of the natural boundaries of the firm Variations in the amount of network information outside each network provider’s control Opportunities for arbitrage created by the lack of a unified approach to access pricing April 18, 2008 Yoo - Breakup of AT&T