1. Economics of Telecom TC 310 May 15, 2008

2. Discussion Point Which serves telecom customers better?  Free Market?  Regulated Market? Does this apply to Horizontal, Vertical, or both markets?

3. Network Effects Value based on Number of Users Tipping Point  AKA Critical Mass  Creates cut-throat competition Types of Network Effects  Direct  Indirect Evil Monopoly or Creative Destruction

4. Economies of Scale Similar to Network Effects  Why different? Where is the value added? Costs to firms  Fixed; up-front  Sunk; one purpose  Marginal; doing business For telecom industries, which are high, which are low?

5. Economies of Density Economies of scale based on geography Negative relationship between density and cost Role of Fixed and Sunk Costs Marginal costs similar

6. Natural Monopolies NE + EoS=Monopolies?  Exponential economies of scale  Monopolies best able to reduce prices  Examples? Kingsbury Commitment-dual monopoly natural monopoly State Regulator Benefits  Local income  Social benefits without “taxes”  Public Choice Theory

7. Last Mile Bottleneck Telecom companies frequently vertically integrated  Economies of scope Last Mile facility is most vital for vertical integration and monopoly leveraging  Discriminate against independent competing products  Access to customers

8. Platform Monopoly Traditionally competition helps platform  One monopoly profit principle  Complementary externality When doesn't this apply?  Competition threatens platform  Price regulated platform (Baxter's Law)‏

9. Cross-Platform Competition Effective Competition Good for consumers?  Equivalence  Feasibility  Access Difficult for Regulators?  Non-neutral regulation

10. Convergence Historically communication regulated by medium  Point-to-point is telephone (Title II)‏  Broadcast is radio/TV (Title III)‏ New technologies blurred  Cable (Title VI)‏  Cell Phones (Title III)‏ Examples of technology convergence

11. Internet Convergence Media available  Digital Subscriber Line (telephone)‏  Cable  Wireless  Electric Lines Function  Telephone, TV, Radio, new applications Regulation Implications?  Wireless replacement, Internet replacement of Phones

12. Economics Revisited Traditional Economies still apply to infrastructure Do they apply to services? Competition more efficient, is it fair to society?