Government regulation and innovation in local telephone services

Abstract

This paper studies the effects of government regulation of local telephone services in the United States on the introduction of new telecommunication technologies and services. The traditional regulatory philosophy emphasizes the sensitivity of costs to distance because of the necessity for physical wire paths between communicating parties, and also uses the natural monopoly argument as a reason to deny entrance to competitors. Emerging telecommunication technologies involve costs that are time sensitive rather than distance sensitive, and economies of scale are no longer a determining factor in industry structure. A model contrasting the effects of optimal versus current regulatory policy on innovation in local telecommunications is presented. A forward-looking regulatory philosophy encouraging investments in innovative activities is preferable to a philosophy which emphasizes the treatment of past investments.