The Economics of Innovation in the Telecommunications Industry

By John R. McNamara | Go to book overview

CHAPTER 5
The Determinants of Telecommunications Market Structure

Market structure, the configuration of buyers and sellers in a market, plays a central role in both price determination and the rate of innovation in an industry, where the industry is defined as the sellers of the product. Innovative activity, in turn, affects the trajectory of market performance over long periods of time. Since a market is composed of both the buyers and the sellers of a product, its structure is, in part, determined by the number and sophistication of buyers as well as the number of sellers. As the number of buyers and sellers increases, competition tends to become more effective. There are numerous bids for available supplies of the product as well as numerous offers, and the likelihood of collusion among buyers or sellers diminishes.

The structure of the industry--the number and size distribution of firms selling in the market, the conditions of entry and the degree of concentration of business among firms--is generally formed by the technical conditions of producing and marketing the industry's products, by the characteristics of consumer demand and by the legal and regulatory environment in which the industry operates. Regulatory policy, when it exists, shapes industry structure and behavior, with the intention if not always the effect of bringing about socially desirable market performance.

Controversy arises over the precise criteria to use in evaluating economic performance. Regulatory officials, working within a circumscribed legal framework, tend to emphasize fairness at the expense of either static or dynamic economic efficiency. Economists use the public

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