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Market Definition and the Economic Effects of Special Access Price Regulation

Market Definition and the Economic Effects of Special Access Price Regulation

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P
HOENIX
C
ENTER
P
OLICY
P
APER
S
ERIES
 
Phoenix Center Policy Paper Number 37:
 
 Market Definition and the Economic Effects of Special Access Regulation
T. Randolph Beard, PhDGeorge S. Ford, PhDLawrence J. Spiwak, Esq.
 (October 2009)
© Phoenix Center for Advanced Legal and Economic Public Policy Studies, T. Randolph Beard,George S. Ford and Lawrence J. Spiwak (2009).
 
 
Phoenix Center Policy Paper No. 37 
 Market Definition and the Economic Effects of Special Access Price Regulation
T. Randolph Beard
*
 George S. Ford, PhD
 Lawrence J. Spiwak, Esq.
 
(© Phoenix Center for Advanced Legal & Economic Public Policy Studies, T. Randolph Beard,George S. Ford and Lawrence J. Spiwak (2009).)
 Abstract:
Market Definition is an essential ingredient to competitive andregulatory analysis. Yet, there is significant disparity regarding thedefinition of the relevant geographic market for high-capacity circuits,commonly referred to as Special Access services. Given the presentdebate over expanding price regulation in this sector, the importance ofmarket definition on the expected economic effects of regulation is worthevaluating. In this P
APER
, we demonstrate that if geographic markets are“location specific” and supplied by a monopolist as the proponents ofregulation claim, then price regulation reduces economic welfare in allinstances. That is, even with monopoly supply, regulation offers noimprovement in economic welfare, meaning the debates over the extentof competition and profit margins in such markets are irrelevant. Theeffect of regulation is mostly to transfer profits from sellers to buyers, sothe debate appears to be largely a quibble over rents. That said, every $1of transfer costs more than $1 to society, so regulation reduces welfare.This analysis demonstrates that the present case for regulating high-capacity services is woefully inadequate and poorly conceived.
*
Senior Fellow, Phoenix Center for Advanced Legal & Economic Public Policy Studies;Professor, Department of Economics, Auburn University, Auburn, Alabama.
Chief Economist, Phoenix Center for Advanced Legal & Economic Public Policy Studies.
President, Phoenix Center for Advanced Legal & Economic Public Policy Studies. Theviews expressed in this paper are the authors’ alone and do not represent the views of the PhoenixCenter, its Adjunct Fellows, or any of its individual Editorial Advisory Board members. We areindebted to Professor Michael Stern, Senior Fellow, for his assistance in formulating the economicmodel presented in this paper.
 
2 P
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ENTER
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OLICY
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APER
[Number 37
Phoenix Center for Advanced Legal and Economic Public Policy Studieswww.phoenix-center.org
T
ABLE OF
C
ONTENTS
 
I.
 
Introduction ................................................................................................... 2
 
II.
 
The Welfare Effects of Price Regulating High Capacity Circuits ........... 9
 
A.
 
Two Key Assumptions: Point-to-Point Geographic Marketsand Monopoly Source of Supply .......................................................... 9
 
B.
 
Regulation and Bilateral Monopoly ................................................... 13
 
C.
 
The Node Decision ............................................................................... 18
 
D.
 
Posting Price with Flexibility .............................................................. 19
 
E.
 
Dividing the Rents ................................................................................ 20
 
F.
 
Comparison to the Textbook Monopoly Case .................................. 20
 
III.
 
Numerical Simulation of the Theory ........................................................ 24
 
A.
 
Simulation Setup .................................................................................. 24
 
B.
 
Results with Seller’s Right to Refuse ................................................. 25
 
C.
 
Results with Seller Mandate to Provide ............................................ 26
 
D.
 
Distribution of Gains ............................................................................ 27
 
E.
 
The Regulated Price with Highest Welfare ...................................... 28
 
IV.
 
Conclusions .................................................................................................. 29
 
I.
 
Introduction
Businesses and other telecom service providers, such as wireless carriers, usehigh capacity “special access” circuits to provide reliable and guaranteedbandwidth between business locations, cell phone towers and, increasingly, thepublic Internet. The Federal Communications Commission (“FCC”) traditionallyregulated high capacity circuits pursuant to rate-of-return and, later, price capregulation, but beginning in 1999 the FCC began to grant incumbent telephoneexchange carriers (“incumbent LECs”) pricing flexibility on a metropolitanstatistical areas (“MSAs”) basis if the incumbent LEC documented the presenceof alternative competitive facilities.
1
 Like seemingly every FCC action, the FCC’s
Pricing Flexibility Order 
has itsdetractors, and the efforts to reverse the decision grow stronger by the day.Competitive carriers recently put the re-regulation of high capacity services on
1
 
 Access Charge Reform,
Fifth Report and Order and Further Notice of ProposedRulemaking, 14 FCC Rcd 14221 (1999) (hereinafter
Pricing Flexibility Order 
),
aff’d sub nom. WorldComv. FCC,
238 F.3d 449 (D.C. Cir. 2001).

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