Book review

Competition in Telecommunications

By Jean-Jacques Laffont and Jean Tirole (MIT Press, Cambridge, MA, 2000)

Competition and Regulation in Telecommunications: Examining Germany and

America

Edited by J. Gregory Sidak, Christoph Engel and Gunter Knieps (Kluwer Academic

Publishers, Boston, MA, 2001)

In these two books, the authors analyze regulatory reform and the emergence of

competition in telecommunications and in network industries in general. It is now almost

universally accepted that a market segment that is subject to strong competition (even

potential competition) should be deregulated. The ubiquitous rule in both of these books is

‘‘Competition where possible, regulation only where unavoidable’’. One of these con-

tingencies, in which regulation is unavoidable, is when one of the competitors owns a

bottleneck (such as the local loop in the telecom market or the power transmission grid in

the electricity market). Both of the books stress a number of shortcomings of the

regulatory framework in general, and of the regulatory framework in the new telecoms

environment in particular.

An important expected change in the future telecoms market is the potential competi-

tion from neighboring markets (primary electricity and railways network infrastructure),

which had been prevented until now. This ‘‘substitution competition’’ should not be

prevented from occurring.

The Laffont and Tirole book fills a gap by providing a clear conceptual framework for

thinking about the key issues facing the new competitive environment in telecommuni-

cations. The authors emphasize the importance of removing price discrimination, both at

the retail and the wholesale levels, as a means to reduce price distortions in the telecom

industry, and warn against problems and pitfalls with asymmetric regulation (such as those

in place in the US and the UK) and price-cap regulation. They show that asymmetric

regulations create perverse incentives and suspicion against the integrated operator at the

telecom market. Laffont and Tirole also show that the deregulation of competitive

segments is costly, since it substantially increases the monitoring requirements.

The Laffont and Tirole book has seven chapters. The first chapter provides the reader with

some background concerning the technology and regulatory debate in the telecommunica-

tions industry. The next five chapters cover central topics of the recent deregulatory

movement: incentive regulation (chapter 2), essential facility and one-way access (chapters

3 and 4), two-way interconnection (chapter 5) and universal service (chapter 6). Chapter 7

then concludes with discussion on the Internet and regulatory institutions.

PII: S0176 -2680 (01 )00062 -3

www.elsevier.com/located/econbase

European Journal of Political Economy

Vol. 18 (2002) 609–610

The second book, edited by Sidak, Engel and Knieps, is an attempt to evaluate the

regulatory compact of telecom markets in Germany and the US. As was said before, all the

writers share the same desire to find an ‘‘effective magic potion’’ for the telecom sector, in

order to demarcate regulatory responsibilities and those areas that can be deregulated.

Indeed, this desire is the main motivation of the first paper by Moschel, which talks

about ‘‘today’s often fuzzy and tangled’’ regulatory responsibilities in Germany.

The two following papers, by Engel and Knieps, investigate future prospects and

potential problems in Germany’s restructured telecom markets, as well as the current

outcome of the German Telecommunications Act. They emphasize that past and present

problems are due to asymmetrical regulation, namely, the risk of subsidizing inefficient

competitors and technologies and creating incentive problems on a long-term basis. They

also suggest solutions to these transition problems (from a vertically and horizontally

integrated monopoly to a competitive environment).

In his paper, Engel looks at asymmetric regulation as a kind of industrial policy, which

treats the firms involved unequally by favoring the ‘‘supposedly weaker ones’’ and

protecting them against competition. Moreover, Engel shows that this kind of discrim-

ination on one side of the market (the incumbent), and favorable treatment to the other

side, namely the competitors, provides an incentive to those entrants to ‘‘turn regulation

into a permanent state of affairs’’. Nevertheless, the new competitive entrants can leapfrog

the incumbent, by implementing the latest economic and technical standards, thus

avoiding the incumbent’s stranded costs and excess of personnel.

In the last two papers, Hausman, MacAvoy and Sidak discuss the impact of incorrect

regulatory policy on economic development. Hausman talks about the inappropriateness

of the TSLRIC as a cost measure for setting prices for unbundled elements, and considers

some kinds of alternative cost measures for price-regulation. The conclusion, however, is

that these options will not solve the problem. Therefore, ‘‘a better approach would be not

to regulate. . .’’. In their paper, MacAvoy and Sidak supply a very interesting discussion on

stranded costs.

To sum up, these two important books make research on competition and regulation in

Telecommunications accessible to a broader and more heterogeneous audience and should

be required reading for all those interested in the problems and issues of regulation policy.

Eli Goldstein

Department of Economics, Bar Ilan University,

52900 Ramat Gan, Israel

E-mail addresses: goldste@popeye.cc.biu.ac.il, goldseli@yahoo.com

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