The Unpredictable Certainty White Papers (1997) / Chapter Skim
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The Economics of Layered Networks
The Economics of Layered Networks
Pages 241-247
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From page 241... ...
A key component of the ODN is He unbundled bearer service, defined to be "an abstract bit-level transport service" available at different qualities of service appropriate for the range of ND applications. The committee states that "bearer services are not part of the ODN unless they can be priced separately from the higher-level services" (p.
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From page 242... ...
When neither of these pure market forms exist, economic theory does not provide any general conclusions regarding equilibrium price structures or industry boundaries. While substantial progress has been made in developing game theory and its application to oligopoly,3 no completely general results on pricing are available.
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From page 243... ...
The variety of organizational forms in use raises the following question: Can ISPs with varying degrees of integration coexist in an industry equilibrium, or are there definite cost advantages that will lead to only one kind of firm surviving in equilibriums The answer to this question hinges on the relative cost structures of integrated and unintegrated firms. The costs of integrated firms depend on the costs of producing the underlying transport fabric on which IP transport rides.
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From page 244... ...
and competed solely on price, economic theory predicts that they would soon go out of business: '~With equally efficient firms, constant marginal costs, and homogeneous products, the only Nash equilibrium in prices, i.e., Bertrand equilibrium, is for each firm to price at marginal cost." If this theory is correct, firms could recover the one-t~me costs of service activation and deactivation through a nonrecurring service charge, and recover ongoing customer support costs by billing for assistance, but they would not be able to recover their sunk cost. Industry leaders seem to be aware of this possibility.
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From page 245... ...
In his words: "The long-term result might be a gradual disinvestment in networks, the reestablishment of monopoly, or price cartels, and oligopolistic pricing." Thus policies promoting competition in the provision of unbundled bearer services among owners of physical networks may ultimately fail. The market may be moving toward contract carriage based on tenn/volume commitments and increasing efforts at differentiation, and away from the ideal of an unbundled bearer service.
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From page 246... ...
These are the familiar ones related to resale and interconnection, with the added complication of competition among multiple owners of geographically coextensive physical networks. This paper has provided references to recent developments in telecommunications markets and identified strands in the economics literature that are relevant to the cent issues raised by the bearer service.
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From page 247... ...
1994. "Economics of Scale, Natural Monopoly, and Imperfect Competition in an Experimental Market," Southern Economic Journal, October, pp.
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