Coursehero >> Illinois >> Illinois State >> ECO 235

Course Hero has millions of student submitted documents similar to the one below including study guides, homework solutions, papers, exam answer keys and textbook solutions.

235 ECO Economics of Telecommunication Dr. David Loomis Department of Economics Illinois State University What do we do about Monopolies? Uncontrolled monopolies have higher prices and less output than perfect competition They have productive inefficiencies and allocative inefficiencies Therefore we need government intervention in the form of regulation Types of Regulation Antitrust Policy - seeks to protect consumers from anticompetitive behavior through the judicial system Direct Regulation or Economic Regulation controls pricing and/or output due to the belief that the industry is inherently Types of Regulation Social Regulation - controls undesirable consequences of firm behavior to obtain various social goods such as clean air and water, safe products and workplaces Regulating Telecommunications Rate-of-Return Regulation Rate -of-Return Regulation (ROR) Regulators constrain total earnings and revenues (formula) They determine a fair rate of return; a "used and useful" rate base; and "just and reasonable" rates Reasons against ROR Gold-plating - "pad the rate base Non-cost-based pricing of services causes distorted economic signals Hinders innovation Very Costly - $1 billion annually Telecommunication Technology Network Technology - Why Switching? Suppose 4 people want to call each other. The number of lines needed would be 6. Efficiencies of a Switch # of People 5 10 50 100 1000 # of lines # w/ switch Public Network Terminology Public Network Terminology Cost Characteristics of the Public Switched Network Production facilities have well-defined capacities; cost of operation is independent of usage of those facilities. Variable costs are small. Network parts are used in joint production of several products and services. Marginal cost of making a local (unmeasured) call is very small; less than a penny. Traditionally considered to be a NATURAL monopoly Natural Monopoly When one firm can produce all the market output more cheaply than 2 or more firms Economies of Scale Economies of Scope Marginal Cost Pricing? In telecom, there are significant economies of large-scale production In an industry with economies of scale, the LRAC curve is downward sloping If average cost is declining, then the MC is below AC if prices were set equal to marginal cost, the firms would go bankrupt Incentive Problem assume regulator prices at P=ATC and firm earns no economic profit. No incentive to cut costs - increasing costs lead to increasing prices Demand Characteristics of the Public Switched Network Individual demand can be random, but market demand had regular daily and weekly patterns. Highest in late morning and mid-afternoon. Calls to one location can't be substituted for calls to another. Positive network externality the value of the network to a given user increases with the number of users who have access to it. Definition - Positive Externality - Result of an activity that causes incidental benefits to others with no compensating compensation provided to or paid by those who generate the externality). Benefits of Interconnection Because of network externalities, interconnecting two separate networks increases the value of both. Example, early days of e-mail, MCI mail, and CompuServe customers could only send messages to other subscribers of that network. Internet's interconnectivity all allowed mail systems to talk to each other. Public policy of Interconnection "A dominant theme in telecommunication policy is defining the rights and responsibilities for the interconnection of networks and the appropriate payments for interconnection under a wide variety of different conditions. Brock p. 62 Back to Demand Characteristics Demand for network access is inelastic Local calling is inelastic LD calls more elastic but still less than 1. Residential demand is more elastic than business customers' demand. Definition of elasticity of demand % change in quantity demanded divided by % change in price. If >1, elastic. If <1, inelastic If = 1, unit elastic. Increase in price causes TR to increase if inelastic, decrease if elastic and stay the same if unit elastic. Calling Party Pays In landline network, traditionally the calling party pays for the whole call and the called party pays nothing even though it receives a benefit. In wireless, you pay for both sending a receiving calls. 800/888 numbers - called party pays Revenue Sharing Revenue sharing arrangements for LD call customer paid single charge to originating telco and revenue was divided among the companies participating in the call. Market Structure Today Key to understanding market structure is LATAs LATA - Local Access and Transport areas created at the divestiture of AT&T, these are areas that the RBOCs are precluded from operating outside of. (map of IL LATAs) Types of Calls Local calls - defined by company regulated by state commission Intra-LATA calls - "toll" calls - calls that originate and terminate within the same LATA. Usually defaults to the local telephone company. Some states allow competition. Regulated by state regulatory commissions. InterLATA intrastate calls - calls that originate and terminate in different LATAs but are still within the same state. Regulated by state regulatory commissions. Types of Calls InterLATA interstate calls - calls that originate and terminate in different LATAs and states. Regulated by the FCC. Local telcos provide access to the local network to IXCs for interLATA calls. This is called "switched access". Access for intrastate switched access is regulated by state; interstate is regulated by FCC. Company types Local Exchange Companies (LECs) 7 RBOCS - NYNEX; Bell Atlantic, Bell South, SBC (formerly Southwestern Bell), Ameritech, US West, Pacific Telesis. In 1982, 25 Bell Operating companies served 81% of the phone lines but only 41 % of the assigned geographic territory in the U.S. (Brock p. 65) Large "independents" - GTE, Sprint Local (Centel), SNET, thousands of small independents A total of 1,432 independent telcos served the remaining 59 % of the territory but provided only 19% of the telephone lines. (Brock p. 65) Company types Interexchange carriers (IXCs) Traditional Long Distance Carriers - AT&T; MCI/Worldcom, Sprint, Qwest, and thousands of resellers. 2001 Market Share of IXCs Company AT&T MCI Worldcom Sprint RBOC affiliate All Others (1000 s) Market Share 37.4% 23.4% 9.3% 6.0% 23.8% Company types CAPs Competitive Access Providers ALTs Alternate Local Transport companies CLECs Competitive Local Exchange Companies Started by supplying high-speed data and voice in local market to large business MFS, Teleport, Eastern Telelogic

Find millions of documents here - Study Guides, Homework Solutions, Papers, Exam Answer Keys and more. Course Hero has millions of course related materials that will enable you to learn better, faster and get an A in all your courses.
Below is a small sample set of documents: