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The structural transformation of the Intercity Telecoms Market (ITM)

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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  1. 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.

  2. What caused the transformation? • Economists identifytwo principal factors: • Growth of demand • Technological change--specifically the developmentof microwave transmission

  3. Growth of demand • Population growth • Rising personal income and highincome elasticity for long distanceservice. • Proliferation of computers anddata processing.

  4. $ 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

  5. 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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