Strategic Management: an Integrated Approach

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Can We Avoid Repeating the Mistakes of the Past in Telecommunications Regulatory Reform? Professor Charles H. Fine1 Professor John M. de Figueiredo2

Working Paper 2005-001 MIT Communications Futures Program Massachusetts Institute of Technology 77 Massachusetts Avenue Cambridge, Massachusetts 02142 http://cfp.mit.edu

March 21, 2005

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Can We Avoid Repeating the Mistakes of the Past in Telecommunications Regulatory Reform ?

Professor Charles H. Fine Professor John M. de Figueiredo

Contents
Executive Summary 1. Introduction and Framework 2. Industry Case Studies A. Railroads 1. History 2. Application of the Framework B. Natural Gas 1. History 2. Application of the Framework C. Banking 1. History 2. Application of the Framework D. Airlines 1. History 2. Application of the Framework E. Mobile Telephony 1. History 2. Application of the Framework 3. Conclusions and Application to the U.S. Telecommunications Industry

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Can We Avoid Repeating the Mistakes of the Past in Telecommunications Regulatory Reform ?

Professor Charles H. Fine Professor John M. de Figueiredo

Executive Summary
In October 1978, Congress passed, and President Carter signed, the Airline Deregulation Act (ADA). The Act created immediate fare flexibility, and put in place a series of “dates certain” for rapid and complete deregulation of prices and entry, ending with the abolition of the Civil Aeronautics Board itself at the end of 1984. Since the passage of the ADA, traffic and innovation have skyrocketed in the airline industry as consumers have saved in excess of $15 billion annually. Despite the recent turmoil in the industry, airline deregulation generally is regarded as a major success. Other deregulation experiences have not gone as smoothly. Railroads, for example, remained regulated for more than three decades after long-haul trucking and the Interstate Highway System began to erode their monopoly power. The delay in deregulation of the railroads cost the economy billions of dollars and led ultimately to the virtual meltdown of the industry in the 1970s. In this paper, we examine the implications for economic welfare of the speed and the scope of industry deregulation. Based primarily on case studies of five industries – railroads, natural gas, banking, airlines and mobile telephony – we find that when strong competitive conditions existed, the slow and incremental approach to deregulation in these industries not only delayed the benefits consumers ultimately reap from deregulation, but also created economic distortions and dislocations. As shown in Table One, the delayed, piecemeal deregulation of railroads, natural gas and banking led to severe economic dislocations. By contrast, quick and complete economic deregulation (i.e., deregulation of prices, as well as elimination of product and market restrictions) in the airline and mobile telephony industries yielded immediate benefits for consumers and far less severe and protracted transitions.

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TABLE 1: Summary of Findings
Costs of Continued Regulation Regulation prohibited price adjustments, longrun contracts, introduction of new technologies, exit from unprofitable markets. Imbalances between intrastate and interstate market; insufficient investment in exploration; shortages; inefficient investment in power generation facilities Type of Deregulation Delayed, Piecemeal Followed by Complete Economic Deregulation

Industry Railroads

Disruption Invention of Efficient Long-Haul Engines; Interstate Highway System; Rise of Trucking as Competitor

Natural Gas

Oil Shocks; Volatility of Energy Prices; Increasing Demand for Natural Gas

Delayed, Piecemeal Followed by Complete Economic Deregulation

Banking

High Inflation/Volatile Interest Rates; New Entry by Money Market Mutual Funds

Banks and S&Ls unable to respond effectively to competition, adjust rates, diversify product lines

Delayed, Piecemeal Followed by Complete Economic Deregulation...
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