Edited by Anastassios Gentzoglanis and Anders Henten
Chapter 2: Intermodal Telecommunications Competition: Implications for Regulation of Wholesale Services
William E. Taylor INTRODUCTION 2.1 The historical paradigm for regulation of wireline telecommunications services has been to regulate both wholesale and retail services of incumbents with the expectation that continued regulation of wholesale services – mandatory unbundling and provision of essential wholesale services at regulated prices – might someday encourage entry and investment in facilities that would permit deregulation of retail services. Regulation of wholesale services would remain a necessary feature of the landscape, unless competition develops for wholesale services. As it happens, intermodal competition for retail telecommunications services has turned this expectation on its head. Paradoxically, intermodal competition for retail services makes regulation of wholesale services unnecessary. Intermodal competitors for retail services such as cable, wireless and Voice over Internet Protocol (VoIP) suppliers serve their customers without requiring use of incumbent local exchange carrier (ILEC) facilities, and retail telecommunications markets are often effectively competitive. In this case, there is no economic rationale to regulate wholesale services. The demand for wholesale services is a derived demand, derived from the demand for retail telecommunications services. And if dependent wireline competitive local exchange carriers (CLECs) can earn no supracompetitive returns in the retail market, so an ILEC monopolist of wholesale wireline services cannot increase its profits by charging a supracompetitive price for its essential wholesale services. Where intermodal competition, by itself, is insufficient to constrain retail prices but requires competition from dependent wireline CLEC competitors, an unregulated ILEC might be able to exercise market power over wholesale services. In this case, the wholesale service...
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