Regulation by TSLRIC: Economic Effects on Investment and Innovation

Abstract

A number of countries have adopted policies to cause dominant network providers to unbundle their networks to provide network elements to new competitors. Two important questions arise with respect to these policies: the degree of network disaggregation that unbundling will cause and the regulated price of the unbundled elements. Economic principles suggest that only the “essential facility” elements of the network, which cannot be economically reproduced in the short term by new competitors, should be unbundled by regulation.¹ It is these essential facility elements that provide the barriers to competition by new entrants. However, if unbundling goes beyond these essential facility elements, new entrants will not have an economic incentive to invest in their own networks. Thus, economic analysis leads to the recommendation that the local network should be unbundled with respect to its essential facility elements, at least in the short run, but that other networks such as long distance and wireless networks should not be unbundled since they do not contain essential facility elements.² Overall, long distance and wireless networks should not be regulated so long as competitive entry is sufficient to keep prices at competitive levels.³