The Effect of Technological Change and Regulation on the Evolution of the New Zealand Telecommunications Market

Abstract

The absence of industry specific regulation of access to the incumbent's telecommunications network in New Zealand for an extended period, between 1989 and 2001, is unique compared with other countries with developed telecommunications markets that were opened to competitive entry. This feature of the New Zealand market provides an opportunity to compare the conduct and performance of antitrust regulation with industry specific regulation introduced in 2001. Of particular interest is the place of the concepts of natural monopoly and perfect competition in the regulation of a dynamic market. This thesis establishes the characteristics that contribute to dynamic supply and demand conditions in the telecommunications market including network effects, discontinuity in demand due to participation, ongoing technological progress of hardware, sunk costs of software development, and the irreversible investment of augmenting capacity to meet expected growth in demand. The economic literature on conjectural variations indicates that under such conditions the concepts of natural monopoly and perfect competition do not explain competitive conduct due to an unstable market equilibrium. The implication is that forming a reasonable view of competitive conduct is limited to the present period of time. It is shown that decisions made under antitrust regulation are limited to the particular context of disputed competitive conduct, and these decisions do not speculate on future competitive conduct. In contrast, industry specific regulation has formed a sequence of views of competitive conduct, looking forward, that is based on concepts of natural monopoly and perfect competition. It is observed that with time, these views of competitive conduct have evolved with the changing market conditions. If regulatory actions evolve with a changing view of competitive conduct they risk reducing dynamic efficiency.