Regulation often is blamed as the cause of many of the current problems and deficiencies in national telecommunications markets. If regulation has so many drawbacks, why should there be any regulation at all?
There are several reasons why regulation can, and should, be part of the telecommunications sector, particularly during the period when the market is moving from a monopolistic to a competitive structure:
There is substantial current support for the proposition that regulation should be streamlined and limited as much as possible. It is generally acknowledged that there is no fundamental reason for structuring a telecommunications market around a single service provider, operating under the intensive scrutiny of the government; this requires the government to make too many decisions that it is not qualified to make, leading inevitably to inefficient or ineffective results. The government should view itself as the "enforcer," charged with the task of preventing participants from abusing their power or harming the network. The government also may want to encourage competitors to embrace certain policy goals, always being careful to avoid imposing requirements that will so distort the market as to render it dysfunctional. If the government interferes with competitive forces, it risks plunging the market into a state of disrepair that will require constant monitoring and correction.
One of the features of evolving telecommunications markets is their use of rapidly changing technology. Isn't any regulatory or other government process ill-equipped to cope with such rapid changes?
For the reasons outlined above, no regulatory or other government process should be asked to prescribe changes in technology. No regulatory process will have sufficient information to make an accurate assessment of the true costs and benefits of significant technological changes. For this reason, centrally planned investment programs, in which the government controls a company's development plans, are likely to be either too ambitious or far less ambitious than would be the case in the absence of centralized government direction.40 The legislative process, which typically responds to change even more slowly than the regulatory process, is especially ill-equipped to manage technological change.41
In light of these considerations, the government can, at best, try to encourage certain liberal approaches to technological change in the telecommunications market. In broad terms, there are two basic options:
There is no perfect solution to the problem of coping with new technology. Where new technology leads to increased productivity or adds substantial value, some users will demand it. The challenge then is to facilitate its provision without forcing a broader class of users to pay for unwanted features and capabilities. At the same time, because of economic disparities among users, the government may be reluctant to permit wealth alone to determine a user's access to new technology.
The challenge of responding to technological pressures emphasizes the need for some flexible institution or process that can absorb information about market conditions and technological options and provide broad and flexible guidance, in light of relevant social and political considerations.
What are some of the broad approaches taken by regulators in the United States to promote competition?
There is a wide range of regulatory possibilities. As a general matter, the United States has moved increasingly away from so-called "structural safeguards" and toward so-called "nonstructural safeguards." Two structural safeguards that were commonly used in the United States include the "line-of-business" restrictions that the MFJ imposes on the RBOCs, as discussed in Section II, and separate subsidiary requirements. The "line-of-business" restrictions flatly prohibit a dominant telecommunications company from entering specified competitive markets. A separate subsidiary requirement is somewhat less onerous, allowing a dominant company to enter a competitive market, but requiring that such entry occur only through a separate subsidiary company that will deal with the parent company on an arms-length basis. A separate subsidiary requirement typically is accompanied by various nondiscrimination obligations, including limits on the amount and type of information that may be exchanged between the parent and the subsidiary and the degree to which parent and subsidiary can share any personnel and "back office" systems (such as accounting).
Although structural safeguards can be very effective in preventing anticompetitive activity, they have been criticized as being excessively burdensome. The "line-of-business" restrictions, it is argued, deny consumers the possible benefits that might arise if an experienced telecommunications company were permitted to be part of a new or emerging business market. The separate subsidiary requirement has been criticized as imposing significant inefficiencies on dominant companies that, ultimately, may lead them to avoid entering new markets. Creating a separate subsidiary, it is argued, requires duplication of resources and functions and artificially separates activities that, if combined, would result in efficiencies and advances.
The chief debate in the United States has been whether the costs of structural safeguards justify the benefits. Not surprisingly, there has been much disagreement about these costs and benefits. In general, however, there appears to be growing consensus that structural safeguards may be more costly than beneficial. As a result, nonstructural safeguards have assumed an increasingly more significant role. In addition to the pricing and interconnection issues discussed in detail in Section VIII, regulatory strategies that are being pursued in the United States in the early 1990s include the following:42
Each of these general policies has costs and benefits. One of the major costs, especially with respect to accounting safeguards, is the complexity of developing and administering the regulatory system.
Professor Coase is one noted proponent of the view that a system of private property rights, rather than regulation, could be used to create functional, unregulated markets. In brief, how has his theory been presented with respect to the communications market?
In one expression of his views, Professor Coase suggested that well-defined private property rights and some pricing mechanism could be used to allocate radio frequency spectrum in the United States. In his view, the FCC need not make such allocation decisions.43
According to Coase, any regulatory agency operates under two "handicaps." First, the agency cannot measure costs and benefits as precisely as the market. Second, the agency cannot possibly possess all of the information relevant to any particular decision. As a result, says Coase, the FCC (like any regulator) is forced to impose arbitrary rules to avoid the extensive delays that would be required if it had to assemble complete information before making its decision. Accordingly, Coase continues, so long as the market can operate in a less costly way than an agency, the market mechanism will be preferable. Inevitably, the market will be more efficient than the agency in allocating resources to the most highly valued uses.
Coase contends that resources will not go to the wealthiest, but to those willing to pay the most. If we accept this proposition, and if we assume that the distribution of funds among the populace is acceptable, then a system in which people pay for certain defined rights could be used to allocate resources.44
Before a functional private market system could establish itself, the rights that could be bought or sold would have to be defined. For spectrum, the rights might involve use of a particular frequency within a particular geographic area. However, even this might be unnecessarily complex. Coase suggests that the law might simply hold that the first user of a frequency would have the right to exclude all others from using that frequency in all areas where the transmission using such frequency could be received.45 Entrepreneurs would then have to decide how much to spend to distribute service over particular frequencies, in light of (1) the number of recipients in a particular area (assuming more recipients create larger potential value), (2) the number of potential sources of interference in such areas, and (3) the cost of reaching such areas. New users would enter the market only if they were to determine that the value of using certain spectrum would be greater than the cost incurred in transmitting the signal and paying preexisting users to vacate the frequency in the relevant area.
Under Coase's view, so long as the rule of law is clear, spectrum will come to be used over time by those who are capable of producing the greatest value. Such market allocation, according to Coase, will be far more efficient and effective than regulatory allocation.
This approach still leaves room for the government to promote activities that have social, but not necessarily economic, benefits. Government also may subsidize the involvement of certain groups who are denied access to funds unfairly or whose involvement is desired on noneconomic grounds, such as diversity.
Will competition inevitably lead to lower prices for users, thereby eliminating the need for price or profit regulation?
If a market has relatively low barriers to entry, competition -- or the mere threat of competition -- should tend to keep prices close to marginal costs. In other words, market conditions will exert downward pressure on profits.
In some cases, however, the mere presence of multiple service providers does not ensure that prices will be lower than they would be if there were only a single service provider. For example, in markets where there are relatively few entrants, the purported competitors may act cooperatively to allow all entrants to charge slightly inflated prices. Often, this cooperation is tacit: that is, companies simply follow the price decisions made by the largest company.46 At times, however, there may be more express cooperation among seemingly competitive firms. In the United States, the antitrust laws may be used to prevent or redress both explicit and implicit concerted action.47 In the absence of an explicit anticompetitive agreement or effective impediments to new market entry, the potential for new entry serves to inhibit noncompetitive pricing and other noncompetitive business practices.48
Occasionally, certain market conditions make it possible even for independent, competitive companies to engage in practices that are perceived as being contrary to the public interest. One such condition arose recently in the United States in the so-called Alternative Operator Services (or AOS) market. The AOS market involves services that are provided to a "captive" group of users to assist them in completing calls or to arrange billing for such calls. AOS companies typically serve such sites as hotels and airports: for example, the AOS provider seeks a contract for all call completion and billing of calls made from the rooms of a hotel; the AOS provider also may furnish all of the pay telephone service to an airport, railroad station, or other public facility. In each case, the user has no choice but to use the AOS company to connect to the public network -- unless the government intervenes.
Essentially free from regulation, some AOS companies imposed service and pricing practices that produced significant public dissatisfaction. For example, unusually high prices were charged for calls, surcharges often were added to the basic tariffed rate for a call, charges were imposed for toll-free -- and even uncompleted -- calls, and customers were seldom permitted to choose the long-distance carrier that would complete their calls.49 In this last case, the customer was forced to use the long distance carrier selected by the AOS company, even if that carrier's prices were high or the quality of its service was poor. Often, the owner of the facility (perhaps a private company, in the case of a hotel, or a government entity, in the case of an airport) shared in the revenues collected by the AOS company. Under the circumstances, unless widespread customer complaints resulted in a loss of business for the operator of the facility, no market condition could force the AOS provider to change its practices. For airports or railroad stations, this prospect was particularly unlikely because the public had no alternative so long as it desired to travel.
In this situation, the allegedly competitive AOS market actually involved a series of noncompetitive service arrangements, whose effects were demonstrably worse for the users than those experienced in the past, when the monopoly phone company provided the same service, but pursuant to a tariff approved by the government. In response to these perceived abuses, Congress amended the Communications Act, by adding Section 226 to impose various restrictions on AOS companies.50 The FCC and various state regulators also adopted rules to address perceived abusive practices.51
The possibility of anticompetitive activity, even in an arguably "open" market, substantiates the need for continued government oversight. Though multiple entrants may provide nominal protection against monopolistic pricing and excess profits, the mere existence of more than one firm is no guarantee that consumers will be well served. It is not inevitable, however, that the government will have to respond with an elaborate system of regulating prices or profits; indeed, such a comprehensive regulatory scheme may be both inappropriate and ineffective. The government should be alert to potential abuses. It also should be prepared with some mechanism, plan, or strategy to curtail the development of undesirable market conditions and, where necessary, end those anticompetitive activities that develop. This contingent approach might involve a scaled-down effort to enforce antitrust or competition laws or the use of some type of regulatory agency to police anticompetitive practices or to take more extensive, proactive measures. The important point is that, at least in its early stages, competition is not likely to provide all of the answers. It should substantially reduce the need for government involvement, but it will not end the need for such involvement.