Telecommunication Industry

Topics: Economics, Telephone, Monopoly Pages: 5 (1450 words) Published: April 26, 2012
The telecommunication industry is considered a vital part of our everyday lives. Although it only represents about 2.4 percen, the services it provides are important to other sectors in the economy. One of the most debatable topics in economics is the Telecommunication Act of 1996, and according to the Federal Communication Commission, “It is the first major overhaul of telecommunications law in almost 62 years. The goal of this new law is to let anyone enter any communications business -- to let any communications business to compete in any market against any other”

In the old days, the telecom industry was viewed as an example of “natural monopoly.” This was due to increasing returns to scale, where the telecom services could only be provided efficiently by a monopoly provider. In the U.S., this pattern started many years ago when the American Bell Telephone purchased the Western Electric Company of Chicago. Alexander Graham Bell patented the telephone in 1876 and formed Bell Telephone. AT&T, which is today one of the leading company in the wireless telecommunication industry, was formed in 1885 to connect the Bell Companies.

In 1913, AT&T agreed to become a regulated monopoly. Although their monopoly was allowed, they were required to connect competing local companies and let the Federal Communication Commission to approve their prices and policies. In January of 1982, AT&T agreed to break itself into a national long-distance carrier and seven “baby bells” in order to end the long-running antitrust suit by the U.S. Department of Justice. The break occurred in 1984. At the time of the breakup of AT&T, almost all telephone companies were monopolies and the increased growth toward competition has been a steady trend. Mobiles phone have grown rapidly since their introduction, and in the majority of nations there is competitio. Through the years, there have been many mergers and acquisitions in the industry that decreased the number of companies in the sector. As of 2008, the major four companies in the U.S. include Verizon, AT&T, Sprint, and T-Mobile. Today, this section of the telecommunication industry falls under the oligopoly market. The characteristics of an oligopoly consist of: (1) a market with a few large firms, (2) high barriers to entry, (3) oligopolistic firms may produce either differentiated or homogenous products, and (4) firms have control over price, but mutual interdependence. BEHAVIORS OF THE MARKET MODEL

Since there are few sellers in the oligopolistic market, the outcomes that follows from the decision of one firm, may affect the other firm. •Due to a few sellers, a key feature of oligopoly is the tension between cooperation and self-interest. •The characteristics of an oligopoly is the cooperation between firms acting as a monopolist and producing a small amount of product and charging a price above marginal cost. •Although oligopolists would like to form cartels and obtain monopoly profits, often that is not possible. Antitrust laws prohibit explicit agreements among oligopolists. •A Nash equilibrium is where each player in the market has selected their best option given what the other players will do. •When firms in an oligopoly individually determine the amount to be produced to maximize their profits, they produce a quantity of goods greater than that produced by monopolists but less than that produced by competition. •The oligopoly price is less than the monopoly price but greater than the competitive price. •Game Theory:

oSince in an oligopoly the number of sellers is small, each firm must act strategically. oEach firm knows that its profits not only depend on how much they produce, but also on what other firms produce.

The telecommunication industry in the U.S. is a sector that has been going through significant changes. These changes include the new services that are available at reasonable prices due to the rapid...
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