THE MARKET STRUCTURE OF BROADBAND TELECOMMUNICATIONS: IS REGULATION NEEDED?

Gerald R. Faulhaber and Christiaan Hogendorn

Abstract
The recent popularity of the Internet and World Wide Web with both consumers and
firms suggests that markets requiring telecommunications networks capable of
interactive high-speed data transfers may emerge in the near future. In the
past, virtually all networks, communications and others, have been subject to
regulation by government agencies, and subject to various restrictions. Two
reasons advanced for this market intervention are (i) the belief that such
networks constitute a natural monopoly for which competition is not feasible,
and (ii) to achieve "universal service," in which all (or most) citizens have
access to network services. In this paper, we develop a model and estimate it
using engineering data which tests whether or not these two hypotheses are like
to obtain for interactive broadband networks. We find that some form of
imperfect competition is likely to emerge if not suppressed by regulation.
Further, the imposition of a non-exclusive "universal service" constraint is
likely to reduce the degree of competition but not foreclose it entirely.

Keywords: economics of information, economics of networks, broadband, Internet
JEL classifications: L13, L51, L96