Gerald R. Faulhaber

Network effects and merger analysis: instant messaging and the AOL–Time Warner case☆

Abstract The AOL–Time Warner merger, announced in January 2000, was and still is the largest merger ever consummated. The merger plan was submitted to the FTC for antitrust review and to the FCC for license transfer review. The FTC approved the merger with conditions relating to open access. The FCC approved the merger subject to a condition (among others) that mandated interoperability for future (but not present) generations of AOLs popular instant messaging (IM) service, based on the potential leveraging of merger assets together with current IM network effects into market power in next-generation IM services. This condition was controversial and represents a new departure in antitrust analysis for industries imbued with network effects. This paper analyzes AOLs IM service and the ability to leverage merger assets into future market power in the context of the FCC condition; counter-arguments are considered and larger lessons for “new economy” antitrust are drawn from this experience and analysis.

The future of wireless telecommunications: Spectrum as a critical resource

Abstract The area of opportunity in telecommunications has been shifting for the past decade from wireline to wireless systems. To accommodate this outpouring of technical and market creativity, wireless systems need access to the electromagnetic spectrum. Unfortunately, the US (and the world) is stuck in a system of allocating this spectrum by government bureaucracy. There are several competing views of how we may free up spectrum by moving away from this “command and control” system: a property rights regime and a commons regime. In this paper, I review the promise of wireless and compare the proposed alternative regimes.

Policy-induced competition: the telecommunications experiments

Abstract Over the past 30 years, the US has initiated a number of regulatory initiatives to open segments of the telecommunications market to competition. I develop a hypothesis regarding why such initiatives succeed or fail, based on a review of these initiatives, and informally test the hypothesis. On the basis of this evidence, I predict the failure of the current local loop unbundling model designed to induce local exchange competition. I also consider other sources of competition and focus on deregulatory actions (in the spirit of the Telecommunications Act) that could unblock alternative technologies that would bring competition to this market.

Public policy in telecommunications: the third revolution

Telecommunications has undergone two major revolutions and is currently undergoing its third and potentially its greatest revolution. In each case, technology and markets drove the revolution, pressing against existing public policy constraints. Eventually, public policy adapted to these revolutions, but at significant economic cost. Public policy will continue to play a crucial role in telecommunications for the foreseeable future, especially as it (perhaps) evolves into the multimedia information infrastructure envisioned by many. However, the appropriate public policy mechanisms to ensure the maximum contribution of this sector to national income will be significantly different from todays policy institutions.

Optimal new-product pricing in regulated industries

Intertemporal pricing issues faced by regulated monopolists in market settings characterized by high rates of innovation have received little attention in the regulatory economics literature. Most analyses of regulatory pricing have focused on monopolies characterized by a stable multiple-good product set. In a regulated industry characterized by technological change in the form of new products and services (such as telecommunications), optimal pricing decisions may also reflect intertemporal market and production factors. In this paper, two such intertemporal factors are modeled: “learning curve” effects on the firms cost function, and customer “demonstration” effects on the demand side of the market. Inclusion of these factors leads to an intertemporal pricing rule that may conflict with the standard regulatory practice whereby each product or service must recoup its own resource costs period by period. Our results suggest that this regulatory practice can result in efficiency losses, since it results in a rate of technological diffusion that is too low.

Letter to Chairman Wheeler: Economic Evidence on Competition in Communications Markets and Implications for Key Policy Issues

Dear Chairman Wheeler:Congratulations on your confirmation as Chairman of the Federal Communications Commission. As economists who study and write about communications policy and regulation, we agree with your comment during your confirmation hearing that “the role of the FCC has evolved from acting in the absence of competition to dictate the market, to promoting and protecting competition with appropriate oversight.” The economic evidence on this point is clear: in all but a few areas, communications networks no longer have the characteristics of natural monopolies, and should no longer be regulated as public utilities. Indeed, the convergence of the communications sector into the dynamic, intensely competitive Internet ecosystem is now virtually complete.We write because we believe these economic facts have important implications for some of the key challenges facing you and the Commission in the months and years ahead.

Telecommunications and the Scope of the Market in Services

The promised liberalization within the European Economic Community in 1992 is likely to be the most significant economic event of the coming decade. Should this transformation actually occur, it will at last create a market, the world’s largest, appropriate to the economic potential of the region. The free movement of goods, people, and information among 325 million consumers, workers, and stockholders promises to create enormous wealth for Europeans and enormous opportunities for the rest of us. I would like to focus on the role of telecommunications services in this transformation, which I believe is far more vital than is generally recognized. Note I use the word “services.” Much has been written and said about the market for telecommunications equipment, including the “threat” of the Japanese and American manufacturers. I am going to ignore completely the trade in telecommunications equipment problem; I view this market as mature, in which transactions are few in number but large in value, very highly politicized, and well studied by others. What I find of far greater interest is the role of telecommunications services in defining the scope of the market of services, which, after, all is what 1992 is all about.