Increased regulation of wireless telephone service is being proposed by both federal and state policy makers, raising the question of optimal jurisdiction. The case for decentralization (state rules) is strongest when the economic activity being regulated is localized and market spillovers are relatively small. Alternatively, the case for uniformity (federal rules) becomes more persuasive when externalities dictate that efficiency in one state is closely tied to efficient arrangements in others. In this situation, balkanization becomes disruptive and federalism becomes ineffective as firms conform not to diverse standards, but in the best case scenario, to the most stringent ones. As an empirical matter, wireless telephony exhibits strong economies of scale and scope, and national networks have proven crucial to industry development. Consolidation of fragmented license areas was, along with new entry, instrumental in reducing rates by seventy-nine percent during the 1993-2002 period. (1)
Some states are considering new regulations for wireless telephone service. (2) Alternatively, federal legislation has recently been introduced to achieve similar objectives. (3) Proposed rules would potentially change marketing practices, alter the information conveyed in newspaper, radio, or TV ads, and stretch the "free trial" periods before "early termination fees" would kick-in (Table 1). The effect on consumers of such measures has been analyzed in previous research. (4) This paper discusses the policy arguments for determining such service rules on a state-by-state basis versus imposing federal regulatory standards.
Portions of this question have been decided in favor of federal jurisdiction, while other responsibilities have been given to state law. Cellular phone service fundamentally depends on spectrum policies enacted by the federal government. The basic market structure questions--how many firms compete, what technologies they use, how much bandwidth they access, and how they interconnect with other networks-are consequently determined by the Federal Communications Commission ("FCC"). Moreover, the Omnibus Budget Reconciliation Act of 1993 established that "no State or local government shall have any authority to regulate the entry of or the rates charged by any commercial mobile service or any private mobile service." (5) This effectively preempted state regulation of cellular rates with a one-year phase-in, meaning that there has been no federal or state regulation of wireless telephone charges since August, 1994.
In the 1993 federal preemption statute, however, states were left with jurisdiction over "other terms and conditions of commercial mobile services." (6) How much regulatory authority this cedes to the states is legally uncertain. (7) In equilibrium, it appears clear that there will be some shared responsibilities, with federal jurisdiction for key economic regulations including spectrum-related issues, and state authority over matters that are traditionally decentralized, such as the resolution of contractual disputes in municipal and state courts.
The question addressed in this paper is where, as a matter of public policy, to draw the line regarding the consumer protection regulations currently under consideration. From the perspective of consumer welfare, and assuming a possible role for regulatory standards, would the standards be most efficiently evaluated and applied by the several states or at the federal government level?
Two broad sets of marketplace evidence help to answer this question, and both suggest that federal jurisdiction is relatively efficient. The first concerns the efficiency of national scope in wireless networks. The economics of wireless telephony suggest that regardless of the jurisdiction selected for rulemaking, diverse local rules will not effectively determine standards. Rather, nationally integrated network operators will choose to conform to those regulations that allow them the best opportunity to offer nationwide service. …