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The Arbitrage Mirage: Regulated Access Prices with Free Entry in Local Telecommunications Markets

Author

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  • Hazlett Thomas W.

    (Manhattan Institute for Policy Research and Columbia Institute for Tele-Information)

  • Havenner Arthur M.

    (University of California, Davis)

Abstract

Incumbent telecommunications carriers have been mandated to share their networks with new retail service providers at regulated wholesale rates. This regulatory structure creates options which incumbent systems must write and which all potential entrants are awarded at a price of zero. Intense debate revolves around the effect of the policy in promoting investment in network infrastructure or retarding it. Rival viewpoints in the policy discussion, however, appear to share the fundamental position that the options issued entrants by incumbent network owners are a transfer of wealth. This paper notes that, to the extent that the regulations actually achieve their purpose in eliminating entry barriers, the assumption is incorrect. Eliminating the sunk costs associated with providing network services can result in regulatory arbitrage that reduces the value of the option to enter to zero. The U.S. market for local telecommunications has witnessed characteristic elements of this rent seeking competition, and financial markets suggest that investors have begun to incorporate the view that the regulated wholesale access regime results in zero long-term profits for entrants.

Suggested Citation

  • Hazlett Thomas W. & Havenner Arthur M., 2003. "The Arbitrage Mirage: Regulated Access Prices with Free Entry in Local Telecommunications Markets," Review of Network Economics, De Gruyter, vol. 2(4), pages 1-11, December.
    • Handle: RePEc:bpj:rneart:v:2:y:2003:i:4:n:8
    DOI: 10.2202/1446-9022.1037
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    Citations

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    Cited by:

    1. Baake, Pio & Kamecke, Ulrich & Wey, Christian, 2005. "A Regulatory Framework for New and Emerging Markets," MPRA Paper 2518, University Library of Munich, Germany.
    2. Pio Baake & Ulrich Kamecke, 2006. "New Networks, Competition and Regulation," Discussion Papers of DIW Berlin 568, DIW Berlin, German Institute for Economic Research.
    3. Thomas Hazlett & Dennis Weisman, 2011. "Market Power in US Broadband Services," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 151-171, March.
    4. Philip Gayle & Dennis Weisman, 2007. "Are input prices irrelevant for make-or-buy decisions?," Journal of Regulatory Economics, Springer, vol. 32(2), pages 195-207, October.
    5. Christian Wey & Pio Baake & Ulrich Kamecke, 2005. "Neue Märkte unter dem neuen Rechtsrahmen: Endbericht ; Forschungsprojekt im Auftrag der Deutsche Telekom AG," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 6, number pbk6, January.

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