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In Competition in Telecommunications, Jean-Jacques Laffont and Jean Tirole analyze regulatory reform and the emergence of competition in network industries using the state-of-the-art theoretical tools of industrial organization, political economy, and the economics of incentives.The book opens with background information for the reader who is unfamiliar with current issues in the telecommunications industry. The following sections focus on four central aspects of the recent deregulatory movement: the introduction of incentive regulation; one-way access; the special nature of competition in an industry requiring two-way access; and universal service, in particular, the use of engineering models to compute subsidies and the design of universal service auctions.
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Chapter 1: IntroductionBroadly speaking, this book analyzes regulatory reform and the emergence of competition in network industries. Incentive regulation and competition are being introduced worldwide in telecommunications, electricity, gas, postal services, and railroads, among others. Yet we have elected to limit the scope of most of our analysis to the telecommunications industry. This choice was motivated by two considerations. First, networks in these industries differ in their technological attributes, such as the routing of services, the location of bottlenecks, the speed of technological change, and the storability of output, as well as in their demand characteristics, such as the existence of network externalities or the cost of service breakdown. While the principles enunciated in this book have some universality, careful adjustments are required in order to apply the analysis performed for one industry to another industry. Second, the telecommunications industry has been at the forefront of incentive regulation reform, and competition there has developed faster than in other industries. The experience gained in the telecommunications industry will be useful for other industries.
While not necessarily representative of the network industries, the telecommunications sector is fascinating in many respects. First, technology is progressing rapidly. "In the old days" (a few years ago) the cozy monopolists who ran the industry offered a small variety of "POTS" (plain old telephone services) such as local, long-distance, and international calls. The advent of high-capacity and intelligent networks has multiplied the number of offerings, or "PANS" (pretty amazing newservices, such as calling cards, toll-free or paying numbers to call businesses, name or number identification, voice messaging, routing of calls, facsimile, data transfers, home banking, video on demand, videoconferencing, and Internet services).
Second, the industry structure too is evolving rapidly. Networks proliferate, and they need to be interconnected: public switched telephone networks, cable companies, competitive access providers, mobile operators, local area networks linking computers, Internet service providers.
With digital technology, telecommunications, cable TV, broadcasting, and computers have become a single industry, which will be a critical element of our economies' backbone. New entrants, such as software companies, information service providers, and media, as well as infrastructure owners (electricity, gas, water, and railroad companies) who can lay telecommunications cables along their networks, are preparing themselves to tap the new markets. With the impending opening of competition, industrial restructuring is progressing at a fast pace. Through mergers and alliances, telecommunications operators are preparing themselves to offer the full range of services. "One-stop shopping" will enable business and residential users to purchase all services from a single supplier. Forty- to sixtybillion-dollar mergers have become commonplace in the United States.
On the economic front, to which we will naturally devote our attention, two fundamental reforms have been or are being implemented. First, incumbent operators are being privatized and are provided with better incentives to minimize cost, as well as more flexibility to rebalance rates in conformity with business and economic principles. Second, markets have been largely deregulated in Anglo-Saxon countries and were legally liberalized in continental Europe on January 1, 1998. Similar reforms are taking place in other network industries such as electricity, gas, railroads, and postal services.
The economics of incentives and organization, political economy, and the new theory of industrial organization all can help us understand regulatory reforms in these industries and their impact on economic efficiency Economists have been at the forefront of the incentives reform. They are currently playing an important role in designing the competitive environment, although, as we will argue, their deregulatory fervor is often guided more by a gut feeling that competition is efficient than by a clear conceptual framework embodying the specificities of these industries. The telecommunications or electricity market is not the same as the wheat or restaurant market, and competition there does not come about as easily...
Table of ContentsSeries Foreword
Laudation for Jean Tirole
1 Setting the Stage
1.2 A Brief Guided Tour through the Telecommunications Industry
1.3 Regulatory Reforms
2 Incentive Regulation
2.1 Economic Principles: PerformanceBased Regulation
2.2 Economic Principles: Pricing Services to the Consumer
2.3 Practical Aspects
3 Essential Facility and OneWay Access:
3.2 Economic Principles
3.3 Refining the Theory: Lack of Instruments and Multiple Goals
for Interconnection Charges
3.4 Two Specific Concerns and Some Common Misperceptions about
Ramsey Access Pricing
4 Essential Facilitiy and OneWay Access:
4.1 General Issues for the Design of Access Policies
4.2 BackwardLooking CostBased Pricing of Access
4.3 Regulated and Deregulated Segments: The Problem of
4.4 ForwardLooking CostBased Pricing of Access
4.5 CostBased Access Pricing and Exclusion
4.6 ECPR and Its Applications
4.7 Global Price Cap
4.8 Global Price Cap and Incentives to Exclude
5 Multiple Bottlenecks and TwoWay
Access with Patrick Rey
5.2 Ineffectiveness of Noncooperative Access Price Setting
5.3 Do Wholesale Agreements Promote Retail Collusion? The Patent
5.4 Application to TwoWay Access Pricing in Telecommunications
5.5 Four Reasons Why High Access Charges May Not Facilitate
5.6 Unbundling and FacilitiesBased Entry
5.7 Alternative Policies
6 Universal Service
6.1 The Need for a New Paradigm
6.2 The Foundations of Universal Service
6.3 The U.S. Telecommunications Act of 1996and Universal Service
6.4 Universal Service Auctions
7 Concluding Remarks
7.1 Internet and Intenet Telephony
7.2 Regulatory Institutions
What People are Saying About This
This book is as systematic, probing, and original an exploration of the important regulatory issues as one can hope for. The authors demonstrate the great analytic competence for which they are deservedly noted.
Laffont and Tirole have combined their mastery of economic theorywith real-world telecom know-how to produce a gem of a book. If youwant to deepen your understanding of telecom—and of networkindustries generally-you must read this book.
This book does an outstanding job of explaining how economic theory can help improve regulation of telecommunications. The authors capture the interaction of competition and regulation in a very sophisticated manner. I recommend the book to economics students, regulators, and other business people and government officials with an interest in telecommunications.
This book is masterful application of the best of economic theory to central issues in telecommunications policy. Throughout, Laffont and Tirole capture the essence of complex issues succinctly and elegantly, without compromising rigor or accessibility. Anyone interested in telecommunications, or in the transition from regulated monopoly to competition more generally, will benefit tremendously from this book.
"Laffont and Tirole have combined their mastery of economic theorywith real-world telecom know-how to produce a gem of a book. If youwant to deepen your understanding of telecom—and of networkindustries generally-you must read this book." Carl Shapiro, Transamerica Professor of Business Strategy, University of California, Berkeley, and author of InformationRules: A Strategic Guide to the Network Economy
Laffont and Tirole show that the tools of economic analysis, when applied with exceptional skill and concern for the facts, can illuminate the difficult policy problems that crop up along the road to competition in telecommunications. This book will quickly become a standard reference.
The lectures are held at the Center for Economic Studies of the University of Munich. They introduce areas of recent or potential interest to a wide audience in a nontechnical way and combine theoretical depth with policy relevance.