Innovation in Telecommunications; The judicial process and the economics of costing, transactions and pricing

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Innovation in Telecommunications The judicial
process and the economics of costing,
transactions and pricing

• Alain Bourdeau de Fontenay
• CITI Columbia University
• Jonathan Liebenau
• Dept. of Management, London School of Economics

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Agenda

• The problem with common approaches to cost,
  transaction and price
• Effects on regulation and judicial processes
• Technological and organizational innovation
• Public policy implications

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The problem with common approaches to cost,
transaction and price

• Opportunity costs are not dealt with well
• Markets (and especially intermediate markets)
  must be tested rather than presupposed
• Endogenous character of technology and innovation
  insufficiently accounted for

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The problem with common approaches to cost,
transaction and price

• Entry is the test of competition
• Wall Street (or other investors) determine entry
• There is no ex ante determinant of innovation
• Viacom took over Paramount and innovated in such
  a way that opportunities proved at least as great
  as costs
• The is no optimal test ex ante for innovation
  competition provides the ex post text (entry and
  survival, plus a low exit cost)

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Innovation and adjustment are integral to
business functions

• Firms must adjust to disruptions whether
  environmental, technological or regulatory
• Pricing vs market positioning as mechanisms
• Incumbents need to able to adjust by coping with
  innovation
• Incentives do not work towards optimal price, but
  can set a sensible price to prime the process

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Its the governance, stupid

• The test is entry
• Exit must be at low cost
• Otherwise expensive public policy costs for, e.g.
  maintaining employment
• Steel in the US in 2002
• Cars in France
• Special pleading by US telecoms

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Trade optimality for innovation!

• There is no optimality no price for efficiency
• Innovation is only possible through competition
• Intermediate markets need to be tested

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Justice Breyers Approach

• Competition should be judged based on the
  viability (without wasteful duplication) of
  common existing types functions or facilities.
• Scrutinize the measures of a hypothetically
  perfectly efficient firm
• Assess incumbents obligations to see if they
  favor inefficient entrants
• Judge pricing methodology based on how it affects
  investment
• Critique efforts to substitute regulation for
  competition

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Exchange regimes

• Approaches from the analysis of common pool
  resources
• Radical changes in regulatory rules change the
  governance of exchange
• Link to research on the exchange commons