Sustainable competition or inevitable monopoly? The potential for competition in network communications industries

Policy related to network communications industries historically has been based on the assumption that the characteristics of these industries will lead to high concentration, and ultimately monopoly. However, current economic theory and empirical evidence is insufficient to determine the industry structure of these markets without regulation. This dissertation provides a formal framework—The Network Pricing Game—to identify when competition between communications networks is a sustainable market outcome. The Game includes characteristics of communications networks, namely significant fixed costs and friction in switching for subscribers, and focuses on those market characteristics that determine whether a competing network will exit. It finds that the sustainability of competition between networks is influenced by initial market share allocations, propensity of subscribers to switch networks, fixed costs of operations, a market's monopoly price and marginal cost. These theoretical findings are used to explain observed pricing behavior and market structure in local telephone markets in New York State. This case study evidence supports the hypotheses that emerge from the Network Pricing Game. An important implication of the Game is that policy must be designed to meet market conditions. In some markets, competition will result without regulation. In other markets, where competition is not sustainable, policymakers may choose to promote competition through regulatory intervention, thereby preventing monopoly where it is the inevitable market outcome. In particular, the relationship of initial disparity in market shares to the potential for competition found in this paper makes the timing of intervention critical. In some markets where monopoly is inevitable in the mature market, earlier regulatory intervention may prevent this “inevitable” monopoly.