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The structural transformation of the Intercity Telecoms Market (ITM).

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The structural transformation of the Intercity Telecoms Market (ITM)

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The structural transformation of the intercity telecoms market itm

The structural transformation of the

Intercity Telecoms Market (ITM)

Some regulatory economists have long argued that the long distance telephone market (or ITM) has long since been “transformed” from natural monopoly to a structure that can efficiently accommodate several long distance providers.


The structural transformation of the intercity telecoms market itm

What caused the transformation?

  • Economists identifytwo principal factors:

  • Growth of demand

  • Technological change--specifically the developmentof microwave transmission


The structural transformation of the intercity telecoms market itm

Growth of demand

  • Population growth

  • Rising personal income and highincome elasticity for long distanceservice.

  • Proliferation of computers anddata processing.


The structural transformation of the intercity telecoms market itm

$

The shift from coaxial cableto microwave might shiftthe cost curve from AC1 to AC2. Or itmight shift all the way to AC*

D3

D1

D2

AC1

AC2

P0

AC *

P*

0

Q*

Q0

4Q*

Q


The structural transformation of the intercity telecoms market itm

Notes on Figure 15.6 (p. 489)

  • If demand remains at D1, then we have a natural monopoly even if the cost curve shifts to AC*-- because this cost function is subadditive up to output Q0.

  • If demand shifts to D2, and the cost function is given by AC*, then natural monopoly has been transformed.

  • If the demand curve shifts to D3, and assuming the cost curve is given by AC* (after the shift to microwave technology), then the market can support 4 long distance firms each operating at minimum efficient scale (MES), where MES = Q*.


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