Strategic Management: an Integrated Approach

Topics: Regulation, Deregulation, Natural gas Pages: 41 (12491 words) Published: April 14, 2013
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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...


Cited: in FDIC, History of the Eighties, $500 billion are based on White’s (1991) estimates which include undiscounted cash flows and thirty-year to forty-year time horizons. See White (1991) p. 197. 34 (GAO 1999: 4) 35 (Vietor 1994: 85) 36 (Cohen and Pogorelsky 2003) 37 (Vietor 1994: 85) 38 (Vietor 1994: 73) 39 (Morrison, Steven A. and Winston, Clifford (1995). The Evolution of the Airline Industry, Washington: The Brookings Institution, quoted in Cohen and Pogorelsky 2003). 40 National Transportation Safety Board data 41 Berry 2003 42 Calculated from nominal price index in (Glass, 2003) which is based on data from CTIA and the U.S. Bureau of Labor Statistics. 43 CTIA conducts a semi-annual survey of the wireless industry and publishes selected results on their web site at www.ctia.org. The data reported in this section are from the year-end-2002 survey available at http://www.wow-com.com/pdf/CTIA_Survey_Yearend_2002.pdf. 44 (1). The Yankee Group, “Landline Displacement Fuels mobile Growth but Market Still Cries Out for Wireless Carrier Consolidation”, October 30, 2002 (Note: Includes business calls on mobile phones and business calls at home. All network minutes are counted twice, once for each person on call); 45 “A Cost of Regulation: Delay in the Introduction of New Telecommunications Services,” J. Hausman and T. Tardiff, 1995 ed. A. Dumort and J. Dryden, The Economics of the Information Society, 1997.
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Banking provides another example of this. After the mass bankruptcies during the Great Depression, Congress imposed significant restrictions on the banking industry, both in the arenas of prices, product and markets, as well as in the domain of safety and soundness. Unfortunately, when deregulation was first tried after the inflation shocks of the 1970s, regulations on safety and soundness were relaxed – while prices were kept under tight control – with disastrous results. After the S&L debacle, regulations were restructured so that constraints on price, product, and market decisions were loosened considerably, while safety and soundness rules were strengthened, with much better results. 47 For definition and exposition of industry “clockspeed,” see Charles H. Fine, Clockspeed: Winning Industry Control in the Age of Temporary Advantage, Perseus Books, 1998. 48 It is important to note that have not considered how the fact the many of the ILECs own a wireless provider affects the 49 Cable television deregulation and reregulation of the the 1980s and 1990s provides an example of this. Re-regulation will be possible provided legislators are sufficiently independent of the inevitable politicking that will occur to prevent re-regulation. 50 The ownership structure in the telecommunications sector is somewhat complex. Most major incumbent local exchange carriers not only own the copper networks in the ground, but also hold large ownership positions of both long distance and wireless carriers. This ownership structure is unlike any other industry we have studied. In essence, one substitute that challenges the traditional phone carriers is actually owned by the traditional phone carriers. Our paper and our theory are silent on this complex ownership structure, though policymakers will need to consider how this affects legislation and regulatory decisions. We leave this to future academic work.
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