Price Theory and Telecommunications Regulation: A Dissenting View

Abstract

In recent years, analysts have increasingly invoked neoclassical price theory to justify radical changes in the regulation of the American telecommunications market, namely the trend toward competition and away from traditional regulatory and rate-setting practices. Many economists assert that competition and marginal-cost pricing will eliminate cross-subsidization and promote efficient markets for local and long-distance telephone services and telecommunications equipment. Price theory, however, does not necessarily support structural reform of the telecommunications industry. Indeed, pre-divestiture pricing policy can be defended on the same grounds its critics employ to advocate structural changes. This article assesses the applicability of static price theory to market conditions currently confronting local operating companies. It challenges the widely held belief that structural reform in telecommunications is necessary to achieve economic efficiency, particularly in intraLATA markets. It recommends that regulators view with skepticism arguments derived from price theory that purport to justify significant departures from historic pricing practices and that advocate wholesale competitive entry into intraLATA markets.