The Economics of Innovation in the Telecommunications Industry

By John R. McNamara | Go to book overview

CHAPTER 6
The Economics of Telecommunications

When significant economies of scale exist or to avoid needless duplication of expensive production and distribution facilities, an appropriate government agency will often authorize a single regulated public utility to serve the entire market in a geographical region so that consumers may benefit from the resulting low production costs. Classic examples of such regulated monopolies in the United States include electric, gas, water and telephone utilities, and various types of transportation and broadcast communication systems. Such monopolies are protected from competition by law, but the monopolist must also agree to government regulation of price and service.

In such cases it is important to determine the extent of economies of scale in order to ensure that the benefits of the natural monopoly structure are not outweighed by the costs and induced inefficiencies of regulation. It is also necessary to examine the proposed regulatory remedies to ensure that they efficiently serve the public interest rather than just protect the monopoly from competition.

Considering the effects of regulatory bureaucratization and the tendency of the law to emphasize equity over economic efficiency, many observers believe that such regulated monopolies have little or no incentive to introduce cost-cutting process innovations or product improvements. Government ownership of utilities is not much better with respect to the promotion of innovative activity. In late 1990 the government of Great Britain was reported to be opening its national telecommunications system, already privatized, to competition from firms in

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