Will the FCC regulate wireless phone rates?

by on September 30, 2009 · 4 comments

Today is the filing deadline in a somewhat unusual Federal Communications Notice of Inquiry that asks how the commission should revise its framework for evaluating competition in mobile wireless communications. Among other things, the FCC asks how it should measure wireless companies’ profits. It’s clear from an earlier public notice issued by the FCC’s Wireless Bureau that regulators are looking for a way to identify “abnormal” profits that might justify new regulation.

For 13 years, Congress has required the FCC to issue annual reports on wireless competition.  These reports have usually found that wireless is pretty competitive by most conventional measures. There are now four national competitors, numerous regional ones that are growing larger, and a bunch of resellers.   The FCC’s most recent report provides numerous examples of innovation in technology, pricing, and services. 

About the only fly in the ointment is federal policies that severely limit the amount of spectrum allocated for “flexible use.”  Limits on the amount of flexible use spectrum are like taxi medallions: they hinder entry and  limit the amount of service the wireless firms can offer.

Nevertheless, the wireless industry’s performance has been impressive. Adjusted for inflation, average revenue per minute fell by 87 percent between 1997 and 2007, and average voice revenue per minute fell by 90 percent.  Just during the last five years, inflation-adjusted average revenue per minute fell by 53 percent, and average voice revenue per minute fell by 61 percent.

Could regulation improve on these outcomes? In our comments to the FCC, Jerry Brito and I offer a little thought experiment.  Suppose the wireless industry were subject to enlightened, highly efficient, and perfectly operating price regulation. Specifically, suppose the FCC had mandated a version of “incentive” regulation that allowed the wireless companies to increase their prices by no more than the rate of increase in the consumer price index minus an annual 7 percent offset to reflect increased productivity. (Seven percent is the highest productivity offset we’ve seen any telecommuncations regulator in the U.S. use in any context.) Would this be better or worse than what the market actually produced?

Wireless market vs incentive regs

This graph shows the answer.  If wireless had been subject to incentive regulation, even a 7 percent productivity offset would have reduced wireless revenue per minute by only 36 percent since 1997 and by 19 percent since 2002.  In other words, the lightly regulated wireless market produced price reductions nearly 2.5 times as large as those that could have been expected under severe, highly efficient, perfectly operating regulation. And these results measure only the price effects, not the explosion of innovation that accompanied the price reductions.

Would the results have been even better if more spectrum were available for wireless services?  Probably. But beyond that step, it’s doubtful that regulators could have done much else to improve on the 90 percent price reduction we’ve seen in the past decade.

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