Why Competition Is Necessary in Telecommunications and How to Achieve It: The Experience of the Advanced Economies

Research and work on this paper benefited from the generous support of Alfred P. Sloan Foundation.-2-Market competition is being introduced into the telecommunications sector in all of the advanced economies as the only means to navigate the profound, discontinuous technological and economic changes currently being experienced as digital information infrastructures emerge. Market competition is not an end in itself, although the US debate sometimes suggests otherwise. It is, rather, a means to generate and capture new opportunities for economic growth and industrial innovation opened by the new information technologies. The introduction of competition has been found to be necessary in the advanced economies because it is impossible to predict either what the value-generating new uses of information technologies will be or what optimum network and market structures are necessary to deliver them to users. Market competition is simply a decentralized logic for making technological and economic choices under conditions of substantial uncertainty. It provides answers that are more likely to be right over time, without having to predict or be omniscient. Below, in Part I, we develop this argument in greater detail. In Part II, based on the experience of the advanced economies, we discuss the six regulatory conditions that, at a minimum, must be satisfied if a nation is to successfully introduce market competition into the telecommunications sector. These six conditions make competition possible, make it work, make it real and effective, and make it enforceable. Finally, in Part III, we discuss the likely economic consequences for China if it fails to introduce sufficient competition in the sector. In particular, the failure to introduce substantial competition will mean, relative to the other advanced economies, that China will sacrifice both short-term revenues and, more important, opportunities for long-term innovation and growth. In endorsing substantial market competition for China, we want to make it clear that there are a range of critical telecommunications issues with which markets cope badly due to market failures and competitive strategies. These include ensuring Universal Service, standards-setting especially for interoperability of the new infrastructures, property rights in information and applications, security and privacy. Although we do not address these issues in this paper, we do acknowledge that they will continue to require a substantial role for policy-making even as competition is introduced. As traditional telecommunications, computing and media haphazardly intersect and stumble toward profitable new opportunities, advanced digital information infrastructures are emerging within the advanced industrial …