New Technologies and Convergence of Markets: Implications for Telecommunications Regulation

Abstract

Technological development has led to the convergence of markets that had been formerly separated by both technology and regulation. In recognition of this trend, regulators throughout the world have opened formerly monopoly markets to competition and have reduced or eliminated barriers to entry by new firms and firms from formerly distinct markets. To the extent that markets have not been deregulated, regulatory obligations have focused on the former monopoly providers of local exchange service. For example, in the United States these carriers have special obligations to provide inputs (e.g. unbundled network elements) to competitors and must meet stringent conditions before being allowed to vertically integrate into the provision of long distance services. At the same time, the same regulators have taken a hands-off position for other services, e.g., the provision of high speed Internet access through cable modems.

This paper evaluates regulatory rules that have been established to facilitate competitive entry, such as the identification and pricing of inputs sold to competitors, in terms of their ability to promote competition. Of particular interest is the efficacy of these rules as competition evolves and the prospects for removing particular rules (sunset provisions) as markets become sufficiently competitive and/or alternative production processes emerge. For example, requirements that incumbent local exchange carriers continue to provide unbundled circuit switching functions when (1) competitors have deployed a growing number of competing facilities and (2) technological advances are producing equipment that provides similar functions in different ways can inhibit economic efficiency and reduce investment incentives. As multi-product firms add new services in often unpredictable ways (through research and development and/or acquisition) and compete by improving their utilization of economies of scale and scope, regulation becomes increasingly ineffective in directing market developments and inimical to efficient competition.