Thursday, May 20, 2010

What Does "Effective Competition" Actually Look Like?

The U.S. Federal Communications Commission seems to be implying that U.S. wireless markets are "not competitive," though the inference is hard to glean from the FCC's own study on the U.S. wireless market. See the document at (http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-81A1.pdf)

What "effective competition" looks like varies from market to market, from economist to economist. How many competitors a market must have to be deemed "competitive" is in this case a political question, not an economist's question, though.

There are some businesses where there is no "effective competition" because the market has "natural monopoly" characteristics. You can think of electrical power, waste water, highways and roads (generally speaking), water systems and national defense as clear examples.

Telecommunications once was deemed to be a "natural monopoly," but most regulators around the world now agree that is true only in part. In triple-play markets, for example, effective competition, but not "perfect" competition can occur, in an economic sense, with as few as two players, even though the U.S. market has many more than that in major metro markets, and typically at least two providers even in the rural markets.

In the real world, there are very few examples of major facilities-based competition beyond two major players, although in a few markets there are three facilities-based fixed line providers. As researchers at the Phoenix Center have suggested, in the fixed line triple play markets, imperfect though workable competition does in fact exist with one one dominant telco and one dominant cable provider. 


See http://www.phoenix-center.org/FordWirelessTestimonyMay2009%20Final.pdf, or http://www.phoenix-center.org/pcpp/PCPP12.pdf or www.phoenix-center.org/PolicyBulletin/PCPB11Final.doc.

The problem is what the level of effective competition actually is in the communications market. Presumably the FCC believes three to five competitors in a single market is not enough.

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