Theory of Privatization and Liberalization in the Telecommunications Sector

The telecommunications sector, as many other network infrastructure sectors, is characterized by two sub-parts: telecommunications network infrastructure and telecommunications network services, which complement each other. In the following part of this study, the special characteristics of the network infrastructure sector, especially the telecommunications sector, are considered from a theoretical perspective.

The most fundamental economic characteristics of the telecommunications sector are network effects (e.g. Liebowitz and Margolis 2002, p. 77; Shy 1999, p. 4). The value of telecommunications networks increases as the number of subscribers grows. A positive external effect is created each time a new subscriber is connected to a network, because the telephones of existing subscribers increase in value as the potential number of subscribers grows (Saunders et al. 1994, p. 271). Liebowitz and Margolis (2002, p. 77) insist that network effects should not be interpreted as network externalities unless the participants in the market fail to internalize these effects. Network effects raise two concerns in terms of the outcome in the conditions of decentralized decision making of laissez-faire markets (Liebowitz and Margolis 2002, p. 77). The first focuses on the sizes of networks. Potential market failures can arise if network participants do not capture the benefits that their participation confers on others. The second arises because scale economies may result in the survival of only one network among the conceivable alternatives, which in turn may prevent decentralized individual choices from being properly counted in the market.