The Economics of Innovation in the Telecommunications Industry

By John R. McNamara | Go to book overview

CHAPTER 7
The Theory and Practice of Government Regulation of Telecommunications

Although the Bell System was dismantled in 1984, seven regional holding companies coming into existence in addition to the downsized AT&T core company, there was no accompanying dismantling of regulatory policies and procedures at either the state or federal levels. Regulation of the telecommunication industry will continue to evolve in coming years, and the transition from regulation towards competition will play a significant role in the growth of markets and the rate of technological advances in telecommunications. A background for studying the effects of regulation on the rate of innovation in telecommunications can be established by a brief review of the historical and legal bases for utility regulation in the United States and a description of current regulatory practice. Several modern theories of utility regulation are then offered.

When substantial economies of scale exist in an industry and it becomes clear that the market is most efficiently served by a single firm, the question of the proper role of government in the regulation of the monopolistic firm becomes important. The first issue to be decided is whether government will take control of the firm's assets and operate it as a government enterprise, or whether the firm will continue as a private entity with its policies and pricing decisions subject to approval by a regulatory commission at the state or federal level. The latter model, being consistent with the status of private property under the Constitution, is more prevalent in the United States, especially when the regulated firm is economically viable and not likely to require government subsidies.

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