Incumbent carrier access pricing policies [cr-95/10/7]


Richard Moore

Dear CR,

I wrote the piece at the bottom in response to a question Rob Frieden
posted to telecomreg.

He evidently found it useful, given his response, immediately below.

I hope it is of interest to this list.


>Date:    Fri, 29 Sep 95 15:54 EDT
>From: "Rob Frieden" <•••@••.•••>
>Subject: Re: Incumbent carrier access pricing policies
>To: •••@••.•••
>Thanks for your insightful and helpful comments.  I'm trying to separate
>rational economics and "hired gun" economics.  I do think a large volume
>user (even a Sky Television) should command discounts on a per unit
>basis, but not to the point of monopsony/discrimination.  Perhaps you
>should post your response.  There are many "hired gun: economists who I'm sure
>would like to set us straight.  Best regards, Rob Frieden Assoc. Professor
>College of Communications Penn State University

>Date:    Wed, 27 Sep 95 09:40 EDT
>From:    "Rob Frieden" <•••@••.•••>
>Subject: Incumbent carrier access pricing policies
>To:      •••@••.•••

>Recently the issue of efficient component pricing was raised.  I'm
>hoping one of more members of the list can provide some broader
>insights on what constitutes "fair" and "cost-based" access pricing,
>particularly when the incumbent carrier provides the underlying
>transport services for both affiliated and unaffiliated enterprises
>who provide both basic and enhanced services.

Dear Rob,

This looks like a very crucial issue as regards whether cyberspace will be
a truly competitive marketplace, whether or not there will be a level
playing field for multiple vendors -- especially independent providers of
services and content.

As a matter of general economic principle, demonstrated historically, there
can be a very fine line between free-market/unregulated competition and the
formation of predatory monoplies.  Given the recent spate of media
mega-mergers, the upcoming relaxation of entry-regulation, the trend toward
vertical integration, and the immense capital reserves poised to throw
their weight around in telecommunications, it is imperative that this "fine
line" be examined under a magnifying glass.

There seems to be an ambiguity in the definition of "fair" -- do we mean
"fair" to the transport provider, or "fair" to the secondary purchaser of
transport?  Certainly a primary transport provider (as we see below) may
consider it "fair" that his costs be covered according to the most
favorable formula he can cause to be adopted.  But to a purchaser of
transport services, "fair" clearly means that he can buy transport at a
price that allows him to compete effectively in the service or content

Any tarrif which permits a tranpsport vendor to both discount his internal
transport usage and surcharge usage to others will obviously create a very
un-level playing field.  It will create a cyber marketplace in which
independent service/content providers would be priced out of the market.
The playing field would be even further tilted by the packaging/marketing
leverage available to the large integrated vendors.  It would be still
further tilted, as we see in the case of Sky TV in the UK, by large-vendor
ownership of premium content (popular movies, live sports events, etc.).
Premium pricing of these products funds even further discounting leverage
to large vendors in their other services.

Under these circumstances, it would be nearly impossible for an independent
service provider to create a product that could compete, or to reach a
potential audience with it.  And even if he did, the big guys could
discount their own similar products until he's driven out of business.
This is classical Pedatory Economics 101, and very common in actual

>Having finally been
>convinced that incumbent carrier should have the flexibility to price
>end user services on the basis of long run incremental costs,(LRIC)

This is still another tilt to the playing field.  The big guys can price
expensive new services cheaply, capture market share, and make their profit
in volume over time.  This practice is difficult for a start-up
independent, even given equal transport costs.  I'm not opposing LRIC
costing, but if it is operative, then there's even more reason to provide
"fairness" by other means to independents, if our goal is to have a
marketplace that encourages competition and innovation.

How our legislators come down on these issues is a litmus test as to
whether they really want competition, or whether they are using competition
rhetoric to disguise a pro-monopoly agenda.  We must be sure they are made
to see the issues clearly, so their decisions will be based on their actual

>I now read from some economists that the verysame carriers for different
>types of services, e.g., access, should have the "right" to tariff
>rates well in excess of LRIC to compensate the incumbent carrier for
>"opportunity costs," (lost revenues that they otherwise would have
>generated but for competition?)

You can always find some economist eager to support any viewpoint you might
want to push; this is the "expert witness" syndrome -- the bane of
regulatory commissions and the democratic process.

The phrase "well in excess" indicates the steep expected slope of the
consequent playing field.  The phrase "but for competition", if your
interpretation of "opportunity costs" holds, underscores the
anti-competitive thrust of their whole line of argument.

>and/or for deficits created by the
>failure of the tariffed rates to compensate the incumbent carrier for
>universal service cross subsidy obligations.

Universal service legislation is dubious in principle, IMHO.  Market forces
can be expected to expand service availabilty widely.  Either the big guys
will pursue marginal consumers so as to maximize market size, or else the
little guys will be left an opening to seek untapped markets among the
"unserved".  Look at how widely cables have promulgated, even in low-income
neighborhoods.  (Not to mention twisted pair and radio-spectrum

We must be on guard for "universal service" being used as a ruse to
subsidise captial investments that should rightfully be borne by the
profit-seeking entrepreneur (large or small).  The above argument of "some
economists" clearly shows this danger is real.

If universal-service cross-subsidy is adopted as a principle, then the
costs should burden those services which cause the least tilting to the
playing field.  Applying those costs to the transport layer causes maximum
market distortion, and that is well known to the big guys.  We'd be better
off if such costs burdened premium services instead, or were applied across
the board to all services at all levels at a single percentage rate.  We
would also be better off if they were charged at the consumer level, as a
"universal service surcharge", as is the practice among RBOCs today.

>In another article I read the view that the incumbent
>carrier should not have to impute the costs of certain inputs when
>providing services to itself (and presumably to corporate affiliates),
>but such costs should be rightfully borne by competitors.

You couldn't get more anti-competitive than this.  It's reverse Robin Hood
running rampant in the Nottingham cyber forest.

>I agree that incumbent carriers--and any carrier for that matter--
>should have felxibility to respond to competetion and that it's not
>discriminatory to charge different rates (on a per unit basis) to
>different categories of users.  However, Title II of the Communications Act,
>which still does apply to dominant and non-dominant carriers alike,
>prohibits discrimination.  How is it not discriminatory to permit
>incumbent carriers to avoid imputation costs and to insert an
>opportunity cost surcharge to competitors who rightfully can demand
>common carrier services?

It clearly _is_ discriminatory.

Different rates for different categories of users needs to be coupled with
appropriate unbundling of layers of service.  This lesson was learned, for
example, in the software/peripheral businesses vis a vis IBM's monopoly
control of the computer business (in the Age of Mainframes).  It was
learned again vis a vis AT&T, and unbundling led to the MCI/Sprint
phenomenon which opened up a competitive long-distance marketplace.

Let's please not regress to the Robber Baron age!  Let's learn from history.

-Richard Moore


 Posted by Richard K. Moore (•••@••.•••) Wexford, Ireland (USA citizen)
                            cyber-rights co-leader