Thursday, June 12, 2014
William Lehr, Massachusetts Institute of Technology (MIT) has a new paper on Benefits of Competition in Mobile Broadband Services.
ABSTRACT: The U.S. economy is as dependent on its networked Information and Communications Technology (ICT) as it is on its networks of roads, electricity, and water. Advanced telecommunications services — which increasingly include wireless services such as mobile broadband — are essential infrastructure for a 21st Century economy. Keeping pace with the growth in wireless demand is confronting policymakers and our wireless industry ecosystem with a mix of complex challenges and opportunities. The challenges include sustaining continued rapid investment and innovation to expand mobile broadband capacity and capabilities while managing scarce spectrum resources more efficiently. These goals must be accomplished in the face of an increasingly complex and dynamic global economy. Success will expand markets and contribute to keeping us on track to reposition our economy for economic growth in the future.
Our success will depend on preserving the benefits of facilities-based competition in the mobile broadband market. The economic viability of such competition is being challenged from a number of directions, including changing technology, market, and regulatory conditions. The purpose of this paper is to explain how mobile broadband competition contributes to value creation and to provide a lower-bound estimate of its sizable dollar impact.
Mobile competition promotes allocative, productive, and dynamic efficiency. Consumers benefit from expanded choice, improved quality, and lower prices. Competition forces firms to adopt industry best practices in order to survive. That means adopting business process and technical innovations that lower costs. Competition also contributes to making the economy more robust in the face of uncertainty and exogenous shocks by ensuring that all of our mobile broadband eggs are not in a single basket. Finally, robust competition in mobile broadband reduces the need to resort to the significantly less attractive alternative of government regulation, enabling society to rely instead on market forces to ensure provisioning of essential telecommunications services. All of these salubrious effects have price effects, too: put simply, efficient competition contributes to lower prices.
Unfortunately, estimating the price effect of competition and its contribution to value is not straightforward. A number of different approaches might be attempted, each with different data requirements and underlying restrictive assumptions that may be subject to challenge. An alternative approach is to review past wireless telecommunications competition and the historical impact of that competition on pricing. If the competitive dynamic observed in the past is continued, it is reasonable to conclude that the pricing effects observed during that time are indicative of pricing effects that might be expected in the future. Based on a historical review of the effects of competition in the U.S. wireless communications market, a conservative estimate is that prices would be at least ten percent (10%) higher were it not for facilities-based competition in the mobile broadband market.
The resulting contribution to consumer surplus of sustaining robust facilities-based competition in the U.S.'s mobile broadband market is adding significantly more than $20 billion in total surplus each year, worth over $200 billion in total. The magnitude of this lower-bound contribution should be kept in mind to focus our priorities in framing communications policies, including our design of the spectrum auctions. Indeed, whereas the auction proceeds are a one-time event, the benefits of competition accrue yearly and are significantly larger.