Dossier

Dynamic Solutions to Policy Failures

Howard A. SHELANSKI
Inter-Modal Competition and Telecommunications Policy in the United States
Key words: telecommunications, inter-modal competition, regulation, competition policy.

This article discusses changes in the U.S. telecommunications market over the last decade and argues that increasing competitive substitution from wireless and internet-based communications has undermined the rationale for conventional monopoly regulation of incumbent local telephone carriers. The article suggests that the time is right to shift from a regime of a priori rules governing incumbent-form conduct to a regime of ex post competition enforcement.

J. Scott MARCUS
Is the U.S. Dancing to a Different Drummer?
Key words: broadband, regulation, competition, VoIP

Is the United States in full retreat from internationally recognized regulatory best practice? Or is it instead headed toward some different destination – "dancing to the beat of a different drummer"? Where is this likely to lead?

Johannes M. BAUER
Bundling, Differentiation, Alliances and Mergers:
Convergence Strategies in U.S. Communication Markets
Key words: convergence, bundling, differentiation, alliances, mergers

Convergence is a multi-facetted phenomenon affecting the technological basis of information and communication industries, the boundaries of existing and new markets, and the organization of service providers. Convergence in substitutes will tend to increase the intensity of competition but convergence in complements may have the opposite effect. Given the economics of advanced communication industries, convergence necessitates strategies to overcome the risk of commodification at the level of networks, applications, and services. The paper examines bundling, differentiation, alliances, and merger strategies adopted by North American service providers in response to convergence. Service providers' opportunities and risks in the emerging environment differ considerably, with cable and telephone service providers presently in stronger positions than wireless service providers, broadcasters, and satellite service providers. New entrants such as Vonage, Skype, Google, and Yahoo have high disruptive potential but remain disadvantaged without their own access networks.

Alain BOURDEAU de FONTENAY, Jonathan LIEBENAU & Brian SAVIN
A New View of Scale and Scope in the Telecommunications Industry:
Implications for Competition and Innovation 
Key words: scale and scope, competition, telecommunications industry structure.

Telecommunication economic analysis has largely relied upon a conventional economic framework that has its roots in neoclassical analysis that emerged almost a hundred years ago, and has contributed to reshaping the direction of economic policies by attacking the premises of the 1996 Telecommunications Act, and providing far greater leeway to incumbents, as well as challenging the economic efficiency of new entrants. Common approaches based upon a large number of simplifying assumptions that include, for instance, the idea that the technology is exogenous. Such hypotheses make little sense at a conceptual level. In addition, this idea is largely contradicted by the short period during which the sector achieved some level of competition around the 1900's and 2000. Not only have economists not thought about any number of such hypotheses, but they have also failed to consider how they might have an impact on their analysis. Evaluating a number of such issues in this paper, we are able to show how conventional economic analysis, uncritically applied to the sector, contributed to the undoing of the 1996 Telecommunications Act and of much of the competition it helped facilitate.

James ALLEMAN & Paul RAPPOPORT
Regulatory Failure: Time for a New Policy Paradigm
Key words: competition, economic dynamics, neoclassical economics, pricing policy, regulation.

Regulation is presumed to be designed to avoid (potential) market failures, usually because of firms' market power, the consequence of which leads to a decrease in economic welfare. However, the cost of regulation may outweigh any effects policy makers have on the firm due to administrative costs, regulatory capture and other effects that have been addressed by others. More importantly, policy makers have been using the wrong models to guide their decisions, with a major impact on the investment incentives of firms, a misallocation of resources and a lowering of social welfare. As policy makers misread economic theory, they produce results worse than those they are attempting to correct. Thus, these distorting effects are equally as bad, or worse than, the market failure regulators hoped to ameliorate. However, this need not be the case. By concentration on dynamic models, rather than the simple static models on which policy makers have focused, it is possible to improve economics welfare and obtain results that at least are better than the costs associated with current regulatory practices. Ofcom appears to be moving in this direction. Will other policy makers learn from Ofcom? This paper shows some of the failures of the current model and sets forth some of the necessary steps to make improvements. However, it is unclear whether the institutional structures will allow for such a departure from the current paradigm.

Pio BAAKE, Ulrich KAMECKE & Christian WEY
A Regulatory Framework for New and Emerging Markets
Key words: new markets, infrastructure investments, regulation.

The future of the information society crucially depends on investments in upgrading existing infrastructures and building new networks. Traditional cost-based regulation, which focuses on issues of static efficiency and service-based competition necessarily has negative effects on innovation incentives and the emergence of infrastructure-based competition in the highly dynamic telecommunications industry. This paper presents a regulatory framework for new infrastructures, which makes ex ante regulation contingent to the tendency towards effective competitive structures. Unlike the standard Significant Market Power-test (SMP), this approach takes a longer term perspective and therefore secures operators' investment incentives. The proposal has several desirable incentive effects. Firstly, it counters incentives to free-ride on investments by potential competitors, and secondly, it makes preemptive and other predatory practices by the investing firm less attractive. As a result, our proposal of contingent regulation in emerging markets promotes infrastructure-based competition in telecommunications.

Georg ERBER
Benchmarking Efficiency of Telecommunication Industries in the U.S. and Major European Countries
A stochastic possibility frontiers approach
Key words: benchmarking, production possibility frontiers, efficiency/inefficiency measurement, J-Curve of adoption of innovations, convergence.

The impact of ICTs on the efficiency of the different national telecommunication industries of the U.S., Germany, France, the UK and the Netherlands is analysed by using a stochastic production possibility frontier approach. By determining the technology efficiency effect frontiers for each single country, one obtains a measure for the evolution of relative inefficiencies over time for each country's industry. The time period covered by the data include a time when the deregulation of the telecommunication industries in these countries took place and the rapid diffusion of two key innovations – the internet and mobile communications – changed the technological and organisational foundations everywhere. The results show that even if the U.S. telecommunication industry led this wave of major innovations as a first mover, thus diminishing its relative efficiency disadvantage versus Europe, the EU countries still maintain a comparative efficiency advantage inherited from the early 1980s. Inefficiency differences between national telecommunication industries on the whole have decreased in the long-run. Differences in the capability to establish and maintain a competitive and innovative national industry, however, still prevail between these countries, even if they have become less pronounced.

Fernando LERA-LÓPEZ & Margarita BILLÓN-CURRÁS
Shortfalls and inequalities in the developmentof E-Economy in the E.U.-15
Key words: e-economy, internet, ICT, digital divide, regional inequalities.

The aim of this paper is to explore the relationships between the several digital divides in Europe, as well as the relationships between the digital divides and the economic development of the European regions. After reviewing the meaning and types of digital divides and the impact of ICTs on economic growth and productivity, we compare ICT adoption indicators at national and regional levels to those of economic development. Our results support the theoretical prediction of a North-South digital divide. Our findings also indicate that the digital divide can differ at a regional level in addition to the national digital divide in the EU-15. These differences reinforce the importance of regional policy in successfully bridging the digital divide in the EU. We have also found that the level of regional development, measured by the GPD per capita, partially determines the regional digital divide in Europe.

Bruno DEFFAINS & Yannick GABUTHY
Efficiency of Online Dispute Resolution: A Case Study
Key words: online dispute resolution, regulation of internet, electronic commerce, bargaining.

The emergence of the internet as a commercial phenomenon has resulted in an explosion of interest in Online Dispute Resolution. Online Dispute Resolution (ODR) consists of a variety of settlement methods, which use the electronic environment to resolve conflicts. The aim of the paper is to evaluate the economic performance of a specific process elaborated by one of the main companies in the ODR world, namely Cybersettle. Cybersettle is a technology-administrated process in which an automated algorithm evaluates bids from the parties and settles the case if the offers are within a prescribed range. While Cybersettle offers an interesting alternative to recourse to legal action, our analysis shows that the proposed settlement system plagues human interaction and creates some crucial inefficiencies. The implications of these results are then used to discuss the competition in the market for electronic justice and the potential role of reputation mechanisms.

James ALLEMAN is a professor in the College of Engineering and Applied Science, University of Colorado, Boulder. Previously, he was a visiting professor at the Graduate School of Business, Columbia University, and director of research at Columbia Institute of Tele-Information (CITI). Professor Alleman continues his involvement at CITI in research projects as a senior fellow. Dr. Alleman has also served as the director of the International Center for Telecommunications Management at the University of Nebraska at Omaha, director of policy research for GTE, and an economist for the International Telecommunication Union. Dr. Alleman was also the founder of Paragon Service International, Inc., a telecommunications call-back firm and has been granted patents (numbers 5,883,964 & 6,035,027 ) on the call-back process widely used by the industry. Currently Dr. Alleman is a visiting scholar at IDATE in Montpellier, France

Pio BAAKE is a research associate at the German Institute for economic research (DIW Berlin). Previously he worked at the Humboldt University at Berlin, where he also received his Ph.D. and his habilitation. His research interests are in the areas of industrial organization theory and regulation.

Johannes M. BAUER is a professor in the department of telecommunication, information studies, and media at Michigan State University. He is also co-director of the Quello Center for Telecommunication Management and Law at Michigan State University. Dr. Bauer joined Michigan State University in 1990 after receiving his doctorate in economics from the Vienna University of Economics and Business Administration in Austria. His work has been published in the leading journals in the field, including Telecommunications Policy, Information Economics and Policy, COMMUNICATIONS & STRATEGIES, and Telematics & Informatics. He is a co-editor of the Journal of Media Economics and serves on the editorial board of Information Economics and Policy.

Margarita BILLÓN-CURRÁS is professor of international economics and international trade at the faculty of economics and business of the Autonoma University of Madrid. Her current research focuses primarily on the New Economy and the economic impacts of information and communication technologies (ICTs). She is also the author of three books and several articles on the New Economy, the globalization process, Spanish external trade, electronic commerce and ICT adoption.

Alain BOURDEAU de FONTENAY teaches in the department of economics at Queen's College, City University of New York and is senior research fellow at the Columbia Institute for Tele-Information. He has written extensively on telecommunications economics and has worked at Bell Laboratories, the Canadian telecommunications regulator. He is also a cofounder of de Fontenay, Savin and Kiss, an international consulting firm. His current work focuses on concepts of markets and other forms of exchange relations, especially in ICTs. He holds a doctorate from Vanderbilt University.

Bruno DEFFAINS is a professor of economics at the University of Nancy (France). For several years he was vice-president for research activities at this university, where he developed a new program in law and economics that is now associated with the CNRS. He has published many articles and books in law and economics. His research interests include economics of accidents law, conflict resolution, internet regulation and comparisons of legal systems, as well as the question of the extent to which law constrains economic growth. Recent publications by Bruno Deffains have appeared in the International Review of Law and Economics, Economica, Revue d'Economie Politique, Revue Economique, etc.

Yannick GABUTHY joined the University of Nancy in 2005 as an assistant professor. He completed his PhD at the University of Lyon in 2003 and was a visiting scholar at the University of Essex in 2001. His main area of research is law and economics, with special focus on dispute resolution (bargaining and arbitration). He has published recently on this topic in the European Journal of Law and Economics.

Yves GASSOT is managing director of IDATE (www.idate.org) for 15 years. IDATE is a leading research institute in Europe dedicated to the Telecom-Media-internet markets. Yves Gassot has acquired a very large experience and knowledge in these industries, with various studies, researches and publications. He is member of many scientific, investment or policy-oriented committees: the French Conseil General des Technologies de l'Information, the board of the International Telecommunication Society, the advisory councel of Pacific Telecommunication Council. He is Publishing Director of COMMUNICATIONS & STRATEGIES, editor of the annual report DigiWorld and in charge of the scientific organization of the IDATE'International Conference. Yves Gassot is graduated in architecture (Paris-1975), has a master from Sciences Po (Paris-1977), and followed the Institut Multimedia's seminars (1988).

Georg ERBER is a researcher at the Information Society and Competition department of the German Institute for Economic Research, DIW Berlin. He studied economics and holds a PhD from the Free University of Berlin. He is currently associate editor of Structural Change and Economic Dynamics (SCED) based in northern Holland. He has also participated in numerous international joint research projects in the framework of EU-research projects, for the Anglo-German-Foundation with Cambridge University, for the German-Marshall Fund in collaboration with Harvard University, for the German Research Council and the Federal Ministries in Germany. His main research interests include industrial economics, network economics with special emphasis on telecommnication and IT services, growth and productivity analysis.

Ulrich KAMECKE has been full professor for economics at the Humboldt University at Berlin since 1995. He is a member of the "Economic Theory" and the "Industrial Economics" committees of the German Economic Association. He is associate editor of the German Economic Review. His current research deals with competition policy, game theory and regulation of telecommunications markets.

Fernando LERA-LÓPEZ is professor of economics at the deparment of economics of the Public University of Navarra (Spain), where he lectures on the European economy, Spanish industry, as well as strategies and decisions within e-enterprises. His current research focuses primarily on the ICT adoption and the role played by ICTs at a national and company level. He is the author of several articles on the New Economy and ICT adoption and has also participated in several research projects in Spain.

Jonathan LIEBENAU teaches in the department of management in the information systems group at the London School of Economics and Political Science. He is also affiliated with the Columbia Institute for Tele-Information, Columbia University Graduate School of Business. He has published articles on high technology businesses, fundamental concepts of information and technology policy. His current research focuses on the use of ICTs in business and the telecommunications industry and regulation in Europe, the USA and Central Asia. He holds a doctorate from the University of Pennsylvania.

J. Scott MARCUS is a senior consultant for WIK-Consult Gmbh in Bad Honnef, Germany. He is also an advisor to the Jamaican regulator, the OUR. From 2001-2005, he served as senior advisor for internet technology for the FCC. During this time, he took leave to serve as a transatlantic fellow of the U.S. German Marshall Fund in order to study telecommunications regulation in the European Union. He is a member of the IEEE Communications Society Meetings and Conference Board, co-editor for public policy and regulation for IEEE Communications Magazine, former Chair of IEEE CNOM, a senior member of the IEEE, and the author of numerous papers and a book on data network design entitled Designing Wide Area Networks and internetworks: A Practical Guide, (Addison Wesley, 1999). Scott holds a B.A. in political science (public administration) from the City College of New York, and an M.A. from the School of Engineering, Columbia University.
scott@scottmarcus.com

Eli M. NOAM is Professor of Economics and Finance at the Columbia Business School since 1976. Director of the Columbia Institute for Tele-Information, a research center focusing on strategy, management, and policy in communications, mass media, and IT. Served for three years as a Commissioner for Public Services of New York State. Appointed in 2003 by the White House to the President's IT Advisory Committee. Noam has published 25 books and over 300 articles, and is a regular columnist for the Financial Times online edition. He is a Fellow of the World Economic Forum, a member of the Council on Foreign Relations, and a commercially rated pilot. He received the degrees of BA, MA, Ph.D (Economics) and JD from Harvard University, and an honorary doctorate from the University of Munich.

Frédéric PUJOL joined IDATE in November 1992. As head of the mobile division, he is responsible for consultancy assignments and prospective studies in this sector. In recent months, he has produced a series of studies on the impact of technological innovation and the new rules of competition in this rapidly expanding sector. Prior to joining IDATE, he acquired in-depth experience in mobile network architecture while with the France Telecom Group (Sofrecom, Télésystèmes). Frédéric Pujol graduated as engineer from ISEN (Institut Supérieur d'Electronique du Nord, Telecommunications option, Lille, 1986) and CITCOM (Technologies communication engineering centre, Network architecture option, Paris, 1987).
f.pujol@idate.org

Paul N. RAPPOPORT is an associate professor of economics at Temple University. He has over 25 years of experience in forecasting and data analysis, modeling and statistical assessment, and specialises in applied telecommunications demand analysis. Dr. Rappoport has written extensively on choice models where he has analyzed network effects and route specific demand. His current research focuses on deriving price elasticities from estimates of a consumer's willingness to pay using survey data; the construction of network (internet) metrics; specifying and modeling business broadband; forecasting demand, measuring the nature of network externalities under conditions of increased competition and modeling the demand for best practice voice-over-IP. He is a senior fellow at Columbia University's Center for Tele-Information and a senior consultant to Global Insight. He received his Ph.D. from the Ohio State University in 1974
paul.rappoport@temple.edu or prapp4@comcast.net

Brian SAVIN is a cofounder of de Fontenay, Savin & Kiss, an international consulting firm and has a background in government (Federal Communications Commission and Federal Trade Commission) and Wall Street. He spent eight years with AT&T corporate headquarters as a member of the law department and, post-divestiture, was a member of the AT&T strategic planning department. He currently works with both incumbent and new entrant telecommunications companies in the USA, Europe and the Pacific Rim on a variety of business and related strategic issues. He has published articles on telecommunications, as well as antitrust issues, including contributions to the American Bar Association's Antitrust Law Developments and COMMUNICATIONS & STRATEGIES. He holds a Joint Degree from Georgetown University.

Howard SHELANSKI is professor of law at the University of California at Berkeley, where he is also a co-director of the Berkeley Center for Law and Technology. His research focuses on antitrust policy and regulation. From 1999-2000 Shelanski served as chief economist of the Federal Communications Commission (FCC) and in 1998-1999 he was a senior economist to the President's council of economic advisers at the White House.
Before teaching at Berkeley, Shelanski practiced law in Washington, D.C. and served as a law clerk to Justice Antonin Scalia of the United States Supreme Court. He earned his Ph.D. and J.D. from U.C. Berkeley and his B.A. from Haverford College.

Christian WEY is head of the "Information Society and Competition" department at the German Institute for Economic Research (DIW) and professor at the Technische Universität Berlin. From 1998 to 2003 he was research fellow at the Social Science Research Center Berlin (WZB). He is a member of the "Industrial Economics" committee of the German Economic Association and research affiliate of the Centre of Economic Policy Research (CEPR, London). His recent research deals with concentration in the retail industry, collective wage-setting regimes and the liberalization of network markets.