Arnold Kling

Broadband and Regulation

Arnold Kling, Great Questions of Economics
Previous Entry Next Entry

The local telephone companies control the "last mile" of phone lines. Under current legislation, they are supposed to act as wholesalers, meaning that a competing company would be allowed to provide DSL service over phone lines by paying a "fair price" to the local phone company.

As it stands, the local phone company that is setting the "fair price" is both a supplier to and a competitor with the companies that would use the phone lines for broadband. So far, the "fair price" has driven just about every competing DSL provider out of business.

On TechCentralStation, Duane Freese argues that this is stifling the growth of broadband.

A better answer that would promote more competition, less regulation and ultimately greater investment and opportunity would split each of the Bells into two arms - a retail firm dealing in competitive enterprises and a wholesale seller of its local loops to each of them.

A counter-argument is that breaking up the Bells in this way would raise the cost of capital for the Bells and thereby reduce their ability to expand broadband. Indeed, the Bells argue that the mere threat of a break-up has a chilling effect.

Another counter-argument is that the Bells do not have a complete monopoly on the "last mile." Cable companies can offer broadband Internet service as well.

Still, I am inclined to agree with Freese.

Discussion Question. Presumably the Bells would break up voluntarily if they thought that this would be good for their shareholders. Even supposing that the broadband market would be more efficient if the Bells were broken up, is it wrong for the government to destroy shareholder wealth by ordering such a breakup?

Return to top