Hal J. Singer

Do Unbundling Policies Discourage CLEC Facilities-Based Investment?

An expanding economics literature has examined the theoretical linkages between mandatory unbundling in the telecommunications sector and the incentives to invest in facilities by both incumbent local carriers and competitive carriers. Recent empirical evidence that substantiates the theory has emerged. That literature documents CLECs’ reluctance to make facilities-based investments instead of availing themselves of incumbents’ UNEs at low regulated prices that are based on total element long-run incremental costs (TELRIC). By examining the variation in facilities-based investment in loops across U.S. states and over time, we find that facilities-based line growth relative to UNE growth was faster in states where the cost of UNEs was higher relative to the cost of facilities-based investment.

The Empirical Case Against Asymmetric Regulation of Broadband Internet Access

The United States has asymmetric regulation of the provision of broadband Internet access service. A cable television system operator is not regulated in its sale of cable modem service. In contrast, an incumbent local exchange carrier (ILEC) that offers digital subscriber line (DSL) service faces price regulation as well as the obligation to offer competitors the use of its broadband network on a wholesale (or, unbundled) basis so that they may offer, in the retail market, DSL services that compete with the ILECs own retail offering to consumers. The social costs of asymmetric regulation are by now familiar. Such regulation leads not to deregulation, but to an enduring managed competition far more complex to administer than traditional regulation of a monopoly service provider ever was. The alternative to asymmetric regulation is either symmetric regulation or symmetric freedom from regulation. Assuming that the latter alternative is preferred, what actual steps would be taken to abolish asymmetric regulation of ILEC provision of broadband Internet access? The Federal Communications Commission (FCC) could remove asymmetric regulation that the agency itself previously imposed. The FCC could declare that broadband Internet access service is not a telecommunications service, subject to numerous regulations applicable to ILECs, but rather an information service, which is free of such regulations. Amid considerable controversy, the FCC invited public comment on such a reclassification in February 2002. Or the FCC could use its power under section 10 of the Communications Act to forbear from regulating ILEC provision of broadband Internet access. A third, and more incremental, approach would be for the FCC to declare ILECs nondominant in the provision of advanced services, such as broadband Internet access. Non-dominant carriers are exempt from price-cap or rate-of-return regulation, as well as the obligation to file tariffs and to establish the reasonableness of those tariffs through the submission of cost data. Much, if not all, of the economic analysis required to determine whether a carrier is nondominant also would be relevant to the FCCs decision whether to forbear from regulating a particular service or whether to reclassify the service in question as unregulated. Although the FCC did not receive its authority under section 10 to forbear from regulation until 1996, the agency has evaluated petitions for nondominance for a longer time and consequently has distilled a body of law on the subject. In this Article, we evaluate the case against asymmetric regulation of broadband Internet access through the lens of the FCCs approach to deciding petitions for non-dominance. We examine the economic evidence relevant to whether ILECs are non-dominant in the provision of mass-market broadband services, the most familiar of which is DSL service. We use a nested-logit discrete-choice model to produce econometric estimates of the own-price elasticity of demand for DSL service and the cross-price elasticity of demand for cable modem service with respect to DSL service. Our findings suggest that demand for DSL service is price-elastic, that DSL and cable modems are in the same product market, and that DSL providers lack market power. The FCC would advance the public interest by ruling that the ILECs are non-dominant in the mass-market broadband services market.

Residential Demand for Broadband Telecommunications and Consumer Access to Unaffiliated Internet Content Providers

In this article, we examine the open access debate in the context of cable services and broadband Internet services from an antitrust framework. Our analysis is prompted by the recent AT&T-MediaOne and AOL-Time Warner mergers, which raise issues concerning the impact of integrated cable content and Internet access to residential telecommunications. Economic analysis, demographic surveys and federal antitrust guidelines each indicate that the broadband Internet access market is distinct from the narrowband Internet access market. Emerging or competing technologies, such as satellite Internet services or digital subscriber lines, cannot discipline the broadband Internet access market over the relevant time horizons. Vertical integration increases the incentives and power of cable providers to discriminate against unaffiliated broadband content, thereby substantially decreasing consumer welfare. We conclude that the recent mergers of cable content and Internet access is the most current manifestation of the classic strategy of cable providers to control alternate channels of content distribution.

The Need For Greater Price Transparency In The Medical Device Industry: An Economic Analysis

Proposed legislation seeks to impose price transparency in the heath care industry as a remedy for increasing medical device prices. This paper analyzes previous attempts to mandate similar price-disclosure rules in a variety of industries. We identify the economic conditions under which mandatory price disclosure is likely to generate substantial benefits and costs. Applying these conditions, we conclude that mandatory price disclosure for implantable devices is unlikely to pass a benefit-cost test.

Vertical Foreclosure in Video Programming Markets: Implications for Cable Operators

This paper argues that a cable operator with sufficient market power in the downstream multi-channel video programming distribution (MVPD) market can deny access to unaffiliated programmers, resulting in an upstream programming rivals exit or impaired dynamic efficiency. Further, market dominance by cable operators may harm consumers of video programming through higher prices and less choice in the downstream MVPD market. The reason is that as unaffiliated video programming becomes affiliated programming, the latter is then withheld from rival MVPDs. This analysis is then applied to the recent acquisition of Adelphia by Comcast and Time Warner.

How Can Regulators Set Nonarbitrary Interim Rates? The Case of Local Loop Unbundling in Ireland

During a period of substantial regulatory change, as in the case of network unbundling in telecommunications, regulators often face the challenge of setting “interim” rates for services. How, in the face of inherently imperfect information and the need to proceed according to what is invariably an expeditious plan of deregulation or industry restructuring, can the regulator select an interim rate that is the least arbitrary? In this Article, we answer that questions using, as a case study, local loop unbundling (LLU) in the Republic of Ireland in 2001. We analyze the interim prices set by the Office of the Director of Telecommunications Regulation (ODTR) for access by competitors to the local network of the incumbent carrier, eircom. The ODTRs interim prices are based on a simple average of the prices in ten European Union countries for the same service. That methodology is flawed because, with minimal effort, the regulator could have used publicly available data to produce a considerably less arbitrary interim rate. A simple average does not produce good in-sample predictions when the sample variance is large relative to the sample mean – as is the case with the prices of unbundled loops in the EU countries. Using a simple multiple regression model, we find that the ODTRs methodology ignores relevant information, such as population, wage rate, population density, and the degree of urbanization, which, in a sample of the fifty U.S. states and ten European countries, explains roughly 25 percent of the cross-sectional variation in unbundled loop prices over and above that which can be explained by the sample mean alone. The regression model would produce an interim rate that is 42 percent higher than the rate set by the ODTR. Finally, we observe that interim rates that impose artificially low pricing of unbundled network elements will discourage facilities-based investment, to the long-run detriment of consumers.

Interim Pricing of Local Loop Unbundling in Ireland: Epilogue

In an earlier article, we presented a case study of local loop unbundling (LLU) in the Republic of Ireland in 2001. We explained how the predecessor regulatory body to the Irish Commission for Communications Regulation (Comreg) could select the least arbitrary interim access rate. This article is an epilogue to the unfolding LLU experiment in Ireland. We provide assess the approach advocated by the Industry Advisory Group (IAG), which was appointed by Comreg to resolve the access-pricing dispute between the incumbent, eircom, and the regulator. The IAG does not provide factual support for its assertions that the low digital subscriber line (DSL) penetration and subscription rates in Ireland result from market failure – that is, that eircom is restricting supply of DSL service. Nor does the IAG provide factual support for its presumption that DSL service represents a distinct product market under standard tools for competitive analysis. Assuming, counterfactually, that the factual basis for such regulatory intervention exists, we articulate the problem confronting Comreg: to estimate the ratio of a variable for which Comreg believes it has very good information (eircoms historical costs) to a variable for which it has no information (eircoms long-run average incremental cost, or “LRAIC”). The IAGs solution cannot inform Comreg of this relationship. The IAG suggests that, after arbitrarily excluding the three countries with the highest LRAICs, eircom should make its unbundled loops available at a price within the range of the remaining LRAICs in the truncated sample. A more principled approach would be to estimate the ratio of historical costs to LRAIC from other countries and then to apply that ratio to eircoms historical costs. Alternatively, one would estimate in a regression model the relationship between LRAIC and the economic and demographic factors that influence LRAIC.

Is the U.S. Government's Internet Policy Broken?

Professor Susan Crawford has just published a thought-provoking book on the future of high-speed Internet access in the United States. At the risk of oversimplifying, Crawfords argument can be summarized in three sentences. Americans need really fast Internet. The market has failed to supply this Internet. Government needs to introduce a “utility model,” where high-speed fiber is made available to everyone at reasonable prices. While Crawford highlights some problems with the current market structure for high-speed Internet services, including important problems with the merger approval process, we feel that she does not provide a fair and balanced view of Internet competition in the United States; in particular, she does not take into account appropriate economic considerations, nor does her policy proposal represent the only reasonable response to the alleged problem. This review article explains that why broadband should not be considered a public good, and why the provision of broadband should not be characterized as a natural monopoly. It also presents some alternative approaches to the policy issues raised in Crawfords book; in contrast to her support of net neutrality, we explain why quality-of-service contracts between access providers and websites should be presumptively procompetitive, and that complaining websites should be compelled to reverse that presumption with strong evidence of discrimination.

Bundles in the Pharmaceutical Industry: A Case Study of Pediatric Vaccines

Bundling by a firm with monopoly power can be shown to reduce consumer welfare in one of two ways. First, by applying the “discount attribution standard,�? bundling can be shown to exclude or impair equally efficient rivals in ancillary or “tied�? markets. Second, by comparing the penalty price of the monopolized or “tying�? product when purchased separately with its “independent monopoly price,�? bundling can be shown to reduce consumer welfare directly. This paper examines both approaches in the sale of pediatric vaccines in the United States. Analysis of contractual terms imposed by incumbent vaccine manufacturers implies large non-compliance penalties, such that there is no positive price at which a hypothetical rival could induce an otherwise indifferent buyer to “break the bundle.�? Furthermore, an analysis of pricing benchmarks indicates that incumbents’ bundled discounts successfully leverage market power from the tying market to the tied market, and observed rival penetration rates indicate that incumbent manufacturers have induced significant foreclosure of rivals. Finally, we analyze the role of Physician Buying Groups (PBGs) in the U.S. pediatric vaccine market, demonstrating that PBGs’ compensation structure distorts their incentives to secure the best prices for healthcare providers.

Econometric tests for analyzing common impact

Abstract In antitrust class-action litigation, courts are increasingly unlikely to accept the presumption that all class members were harmed by price-fixing among a group of firms or by exclusionary behavior by a single firm. Econometric methods typically applied in antitrust and other settings estimate the average effect of the challenged conduct, but do not inform impact for individual class members. We present classwide econometric methods and statistical tests for detecting the existence (or lack thereof) of common impact and determining what proportion (if any) of the proposed class suffered injury in many class actions. We conclude that econometric tools can meaningfully inform the legal process, even when courts demand proof of common impact.