HANDBOOK OF TELECOMMUNICATIONS ECONOMICS

Transcription

1 HANDBOOK OF TELECOMMUNICATIONS ECONOMICS VOLUME 2 TECHNOLOGY EVOLUTION AND THE INTERNET Edited by SUMIT K. MAJUMDAR University of Texas at Dallas, Richardson, USA INGO VOGELSANG Boston University, Boston, USA and MARTIN E. CAVE University of Warwick, Coventry, UK ELSEVIER Amsterdam Boston Heidelberg London New York Oxford Paris San Diego San Francisco Singapore Sydney Tokyo North-Holland is an imprint of Elsevier

2 CONTENTS OF VOLUME 2 OF THE HANDBOOK List of Contributors v Chapter 1 Technology Evolution and the Internet: Introduction SUMIT MAJUMDAR, INGO VOGELSANG and MARTIN CAVE 1. Introduction 2 2. Evolution of Major Alternatives to Traditional Telephone Networks Emerging Network Technologies Bandwagon Effects Platform Competition in Telecommunications Broadband Cable Television Wireless Communications 9 3. The Internet The Economic Geography of the Internet Infrastructure Economics of the Internet Backbone Pricing Traffic on Interconnected Networks: Issues, Approaches, and Solutions Toward an Economics of the Domain Name System Institutional Considerations Bottlenecks and Bandwagons: Access Policy in the New Telecommunications Antitrust Remedies and the Institutional Design of Regulation Telecommunications and Economic Development Institutional Changes in Emerging Markets: Implications for the Telecommunications Sector Conclusions 27 References 28 Chapter 2 Emerging Network Technologies DALE N. HATFIELD, BRIDGER M. MITCHELL and PADMANABHAN SRINAGESH 1. Introduction Voice, Data, and Entertainment Video Signals Signal Characteristics Network Architectures 35

3 X Contents 3. Traditional Circuit-switched Wireline Architecture: Limitations in the Face of New Demands 4. Evolution of the Traditional Wireline Architecture 4.1. Interoffice Transport Facilities 4.2. Interoffice Signaling and the Intelligent Network 4.3. The Access Network 4.4. Architecture of the Internet 4.5. The Network of the Future 5. Evolution of Cable, Wireless, and Satellite Networks 5.1. Cable Television 5.2. Wireless 5.3. Satellite 6. Economic Issues in the Telecommunications Sector Raised by Converging Technologies 6.1. Increased Possibilities of Competition 6.2. Growth and Technology 7. Public Policy Puzzles 7.1. Regulatory Organization 7.2. Social Goals 7.3. Competition and Innovation Appendix A References Chapter 3 Bandwagon Effects in Telecommunications JEFFREY H. ROHLFS 1. Introduction 2. Theory of Bandwagon Demand 2.1. Equilibrium User Sets 2.2. Multiple Equlibria 2.3. Demand as a Function of Price 2.4. Metcalfe's Law 3. Pricing of Mature Bandwagon Services 3.1. Internalization of Externalities 3.2. Budget Constraint 3.3. Externalities 3.4. Externalities and Cross Elasticities 3.5. Nonuniform Pricing 4. Historical Pricing of Telephone Services 4.1. Promotion of Universal Service 4.2. Local Usage Charges

4 Contents of Volume 2 XI 5. Local-usage Charges for Calls to Internet Service Providers Sensitivity of Demand to Price Costs of Fixed Termination Costs of Local Usage Bandwagon Effects Comparison with Actual Usage Charges for Calls to ISPs Charges for Fixed-to-mobile Calls Charges Under Calling-party-pays Economically Efficient Mobile Termination Charges Setting Mobile Termination Charges in Practice A Possible Dual Regime Conclusions 113 References 113 Chapter 4 Platform Competition in Telecommunications JEFFREY CHURCH and NEIL GANDAL 1. Introduction Network Industries Direct Networks Virtual (Indirect) Networks Network Effects From Network Effects to Network Externalities Implications for Consumer Demand Expectations and Competition between Networks Battles for Standards, Compatibility and Adoption Standards Wars Strategies in Standards Wars Standard Wars and Efficiency Battles for Compatibility Denying Compatibility Restricting Compatibility of Complementary Products Cooperative Standard Setting Mandated Standards Advantages of Mandated Standards Advantages of Market Standards Mandated Standards in Telecommunications Networks Case Studies Competition in the Mobile Cellular Industry Instant Messaging 145

5 XII 8.3. The 56K Modem Standards War 8.4. Satellite Vs. Cable Television (CATV) 8.5. DVD Vs. DIVX Standards War Appendix: Modeling Issues References Chapter 5 Broadband Communications ROBERT W. CRANDALL 1. The Technology 1.1. Digital Subscriber Line 1.2. Cable Modems 1.3. Fiber to the Home 1.4. Wireless Access 2. Broadband Diffusion 2.1. Cross Country Comparisons 2.2. Comparing Broadband Diffusion with Other 'Breakthrough' Technologies 3. The Economics of Broadband Supply 3.1. Cable Modems, DSL, and Fixed Wireless 3.2. Fiber to the Home 3.3. The Weak Dominance of Cable 4. The Demand for Broadband 5. Network and Bandwagon Effects 5.1. Internalizing Network Externalities 5.2. Network Effects and First-mover Advantages 5.3. The Broadband 'Bandwagon' 5.4. Consumer Value after the Bandwagon 6. Regulation and Competition 6.1. Platform Competition 6.2. Interconnection and Network Unbundling 6.3. Cable Open Access 7. Subsidies, Universal Service, and the 'Digital Divide' 8. Conclusions References Chapter 6 Cable Television THOMAS W. HAZLETT 1. Spectrum in a Tube 1.1. Emergence of Cable Television

6 Contents of Volume 2 XIII 1.2. Cable Television's Rise to Dominance Basic Structure of the Cable Television Industry Basic Structure of a Cable Television System Market Power in Local Cable Television Service Defining Cable's Market Power Pricing Power Cable Asset Valuation Entry Barriers Intermodal Competition Regulation of Rates Deregulation in the 1984 Cable Act Reregulation in the 1992 Cable Act Deregulation Pursuant to the 1996 Telecommunications Act Cable Television Programming Monopsony Power Vertical Integration Program Access Rules Carriage of Broadcast TV Signals Common Carrier Video The Evolution of Cable 235 References 235 Chapter 7 Wireless Communications JOSHUA S. GANS, STEPHEN P. KING and JULIAN WRIGHT 1. Introduction Background Spectrum Allocation The Range of Wireless Services The Rise of Mobile Telephony Economic Issues in Wireless Communications Spectrum as a Scarce Resource Complementarities in Spectrum Use Standards Diffusion and Demand for Mobile Telephony Diffusion The Relationship between Fixed and Mobile Telephony Costs 259

7 XIV Contents of Volume 2 5. Regulation and Competition Limitations of Wireless Competition Access Pricing and Caller vs. Receiver Pays Conclusions 280 References 281 Chapter 8 The Economic Geography of Internet Infrastructure in the United States SHANE M. GREEN STEIN 1. Introduction Dispersion and Concentration of Internet Infrastructure What is Internet Infrastructure? The Origins of Internet Infrastructure Scale and Urban Location Scale and Standardization Summary The Spread of Commercial Internet Access The Activity of Commercial Suppliers Government Policy Encouraged a Diverse Geographic Supply The Founding of Commercial Organizations Coverage by Dial-up Providers Organizational Strategy and Coverage Variety and Quality Over Geography Summary The Location of Network Backbone The Geographic Features of the Backbone The Industrial Organization of the Commercial Backbone Interpreting Networking Practices Interpreting the Geographic Dispersion of Capacity The Economic Interpretation of Redundancy Boom Leads to Bust in the Backbone Interpreting a Decade of Building Summary The Growth of Broadband Why Broadband Favors Urban Areas The Empirical Evidence The Regulation of Broadband Suppliers Summary The Location of Business Internet Infrastructure Services The Geography of Private Investment in IT-overview Empirical Evidence on Domain Names Evidence on Urban and Rural Business Use of Internet Technology Local Internet and Information Services 355

8 Contents of Volume 2 XV 6.5. Summary Summaries of Answers to Motivating Questions Why did Near-geographic Ubiquity Arise after Commercialization? Why did Market Forces Encourage Extensive Growth? Has the Internet Diffused Disproportionately to Urban Areas? Is the Internet a Substitute or a Complement for Urban Agglomeration? Which Policies Mattered? Were these Effects the Intended or Unintended Consequences? Are there Lessons for Other Countries? 363 References 364 Chapter 9 The Economics of the Internet Backbone NICHOLAS ECONOMIDES 1. Competition among Internet Backbone Service Providers Internet Backbone Services Interconnection The Transit and Peering Payment Methods for Connectivity Conduct of Internet Backbone Service Providers Structural Conditions for Internet Backbone Services; Negligible Barrier to Entry and Expansion The Markets for Raw Transport Capacity and Other Inputs to Internet Transport Services Ease of Expansion and Entry Public Standards and Protocols on the Internet Potential for Anticompetitive Behavior on the Internet Backbone Network Externalities and the Internet Procompetitive Consequences of Network Externalities Conditions Under Which Network Externalities may Inhibit Competition Network Externalities and Competition on the Internet Conditions Necessary for the Creation of Bottlenecks Fail on the Internet Bottlenecks Such as the Ones of the Local Exchange Telecommunications Network do Not Exist on the Internet Strategies that a Large IBP Might Pursue Raising the Price of Transport 394

9 XVI Contents of Volume Discriminatory Price Increases Directed Simultaneously against All Backbone Rivals Raising Rivals' Costs and Degrading Connectivity Conclusions 407 Appendix 407 References 410 Chapter 10 Pricing Traffic on Interconnected Networks: Issues, Approaches, and Solutions ALOK GUPTA, DALE O. STAHL and ANDREW B. WHINSTON 1. Introduction Congestion, Overuse, and Economic Implications Approaches to Deal with Congestion in Computing Systems Economic Implications: Tragedy of the Commons Problem Pricing Approaches for the Internet Traffic A Generic Model of Priority Pricing for Data Networks Model Description Simulation and Results Future Issues and Challenges Overlay Networks Multihoming and Smart Routing Channelling Conclusions 435 References 436 Chapter 11 Toward an Economics of the Domain Name System MILTON MUELLER 1. Introduction Technical Description of DNS The Name Space and Name Assignment Resolution, Name Servers, and BIND Software The Root Servers The Demand for Domain Names Demand for Technical Functions Demand for Semantic Functions Domain Name Supply Root Servers Registries and Registrars The Secondary Market 469

10 Contents of Volume 2 XVII 5. Economic Policy Issues New TLDs: Expanding Supply Domain Name Trademark Conflicts Competition Policy WHOIS and Privacy Policy Conclusions 483 References 483 Chapter 12 Bottlenecks and Bandwagons: Access Policy in the New Telecommunications GERALD R. FAULHABER 1. Introduction Essential Facilities (Bottleneck Access) Network Effects and Interconnection (Bandwagon Access) Network Effects and Corporate Strategy Is Tipping Irrevocable? The 'Serial Monopoly' Hypothesis The FCC's Instant Messaging Condition in the AOL-Time Warner Merger Lessons of the AOL-Time Warner Case Proactive vs. Reactive Serial Monopoly and the New Economy Conclusions 515 References 515 Chapter 13 European and American Approaches to Antitrust Remedies and the Institutional Design of Regulation in Telecommunications DAMIEN GERADIN and J. GREGORY SIDAK 1. Introduction The U.S. Model Ex Ante, Ex Post, and Hybrid Remedies Antitrust as a New Form of Ex Ante Regulation The Shifting Balance of Influence between Antitrust and Sector-specific Regulation: Telecommunications Law's Potential to Shape Antitrustremedies in Network Industries The U.S. Trade Representative as Regulator The EC Model Ex Ante, Ex Post, and Hybrid Remedies 535

11 XVIII Contents of Volume Antitrust as a New Form of Regulation The Shifting Balance of Influence between Antitrust and Sector-specific Regulation: Competition Law Concepts Penetrating Sector-specific Regulation DG Trade as a Regulator? Conclusions 548 References 550 Chapter 14 Telecommunications and Economic Development BJÖRN WELLENIUS and DAVID N. TOWNSEND 1. Introduction Development Significance of Telecommunications Evolution of Policies and Markets Directions of Change Entry and Competition Private Sector Participation Policy and Regulation Results Investment Growth, Productivity, and Prices New Services Mobile and the Internet Lessons From Reform Competition as Driver of Change Narrowing the Development Gap Designing Attractive Business Opportunities Developing Regulatory Capability Managing the Reform Process The Internet Evolution of the Internet in the Developing World Internet Policy Issues for Developing Countries Information Technology and International Trade Economic Opportunity and the Future E-commerce E-learning E-government Knowledge Societies and E-readiness The Path Ahead The Unfinished Reform Agenda Universal Access 615 References 616

12 Contents of Volume 2 XIX Chapter 15 Institutional Changes in Emerging Markets: Implications for the Telecommunications Sector PABLO T. SPILLER 1. Introduction The Utilities' Problem The Political Profitability of Expropriation The Implications of Government Opportunism Sources of Regulatory Commitment Institutional Endowment A Tale of Two Countries Regulatory Governance: Administrative Process with Judicial Review Why Judicial Review? Why Delegate to Independent Agencies Commitment in Unified Government Systems Contract-based Regulation Adapting Contract-based Regulation to Unexpected Shocks: Renegotiation Final Comments 652 References 652 Subject Index 657