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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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slide1
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.

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What caused the transformation?
  • Economists identifytwo principal factors:
  • Growth of demand
  • Technological change--specifically the developmentof microwave transmission
slide3
Growth of demand
  • Population growth
  • Rising personal income and highincome elasticity for long distanceservice.
  • Proliferation of computers anddata processing.
slide4
$

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

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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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