In the absence of competition, regulations serve to protect consumers against monopoly market power. This is, in theory, the reason why the telecommunications local exchange market is so heavily regulated.
Although the days of the monopoly have long passed, how do policymakers know if there is enough competition to let markets operate without regulation?
The Federal Communications Commission (FCC) reports that competitive local exchange carriers (CLECs) now control 16.3 percent of the market, leaving the remaining market share to the incumbent local exchange carriers (ILECs). However, those statistics do not take into account competition from wireless telephones, high-speed data services, and Internet telephony services that use voice over Internet Protocol (VoIP). If wireless telephone services were found to be substitutes for traditional wireline service, then this competition, not to mention competition from other technologies, would make unnecessary the regulations that control the wireline incumbents’ prices and services.
Wireless and wireline services target similar markets, provide similar consumer benefits, and are similarly priced. Thus, wireless services can be suitable substitutes for traditional telephone services.
Consumers Choose Wireless
Overwhelming evidence shows wireless services are in fact replacing wireline services. Wireless service demand is on the rise. Wireline service demand–measured in terms of primary telephone lines, additional telephone lines, and telephone usage–is declining. The Bureau of Census reports that wireless users are beginning to disconnect the wireline services into their homes. Other reports suggest many consumers consider their wireless telephone to be their primary telephone. There is also evidence that small businesses are beginning to use wireless services to replace traditional wireline services. Today, three wireless subscribers are added for every telephone line lost.
Wireless services have become a widely accepted choice for consumer telecommunications needs. Wireless services are especially popular among young consumers, particularly on college campuses. One study suggested college students using wireless services are more likely to continue using wireless instead of wireline services after graduating.
Some policymakers and consumer advocacy groups insist that wireline and wireless services are not direct competitors and should continue to be regulated as if they are separate industries. But an econometric model demonstrated by the Competitive Enterprise Institute (CEI) shows otherwise. The model finds that a 1 percent increase in wireline prices will result in a 2 percent increase in wireless demand. In other words, there appears to be statistically significant evidence that wireless competition prevents wireline prices from rising excessively. That suggests market forces are at work.
Greater Intermodal Competition
In addition to wireless services, intermodal competition is also taking shape in the form of 28 million high-speed service connections, as well as VoIP, that threaten to drive telephone rates lower. The combination of wireless, high-speed, and VoIP services makes traditional telephone services seem antiquated.
CEI has found convincing empirical evidence that wireless services are strong substitutes for wireline services. That has significant implications for competitive and regulatory policies. If wireline service providers cannot raise prices without causing significant line loss to wireless providers, for example, then wireline service providers cannot exert market power. In fact, as wireless prices continue to fall, wireline providers will be under increasing market pressure to drop their prices as well, in order to stem market share losses.
The nature of competition in the telecommunications industry has changed. Today, price and service regulation is largely unneeded, as market forces are sufficient to hold prices in check.
Stephen B. Pociask ([email protected]) is president of TeleNomic Research, a Herndon, Virginia-based consulting firm specializing in public policy analysis, and he is responsible for a wide variety of applied economic studies. This article is adapted from the executive summary of “Wireless Substitution and Competition: Different Technology but Similar Service–Redefining the Role of Telecommunications Regulation,” published by the Competitive Enterprise Institute. The full report is available online at http://cei.org/pdf/4329.pdf.