Toward a Unified Theory of Access to Local Telephone Networks

1
Toward a Unified Theory of Access to Local
Telephone Networks

• Christopher S. Yoo
• University of Pennsylvania Law School
• April 18, 2008

2
The Inadequacy of Current Theory

• The classic approach to network regulation
• Regulates price of outputs to customers
• Bases rates on cost
• Needs no theory of network architecture
• The shift from rate regulation to access
  regulation
• Regulates price of inputs to competitors
• Still bases regulated rates on direct costs
• Requires a theory of network configuration

3
A Theory of Network Configuration

• Based on principles of graph theory
• Models interactions among network components
• Surpasses literature on network economic effects
• Takes into account more than network size
• Provides insights into optimal network
  configuration, cost, capacity, and reliability
• Reveals impact of access regulation

4
Limitations of the Current, Cost-Based Approach
to Regulation

• In effect treats affected elements as if they
  existed in a vacuum
• Overlooks the fact that access can have
  implications for the network as a whole
• If capacity is slack, may overcompensate
• If capacity is saturated, may undercompensate
• May alter optimal configuration
• May degrade reliability/quality of service in
  unpredictable ways

5
Limitations of the Current, Cost-Based Approach
to Access Regulation
b
c
a
d
6
Limitations of the Current, Cost-Based Approach
to Access Regulation
b
c
a
d
7
Limitations of the Current, Cost-Based Approach
to Access Regulation
b
c
a
d
8
Limitations of the Current, Cost-Based Approach
to Access Regulation
b
c
a
d
9
Limitations of the Current, Cost-Based Approach
to Access Regulation
b
c
a
d
10
Limitations of the Current, Cost-Based Approach
to Access Regulation
b
c
a
d
11
Limitations of the Current, Cost-Based Approach
to Access Regulation
b
c
a
d
12
Max Flow/Min Cut Theorem
a
d
11
1
10
2
8
38
7
e
2
8
7
1
26
1
s
t
c
b
24
18
2
C
A
B
f
D
13
Toward a General Theory of Network Configuration

• Provides theory of efficient network design
• Relative cost of switching and linking
• Magnitude variability of network demand
• Economies of scale from aggregating traffic
• Tradeoff between cost and reliability
• Offers formal method for determining rates that
  captures interactions among network elements
• Calculation would be fact and information
  intensive
• Results are very sensitive to the models
  assumptions

14
Toward a More Modest Theory of Network
Configuration

• Distinguishes among five different types of
  access
• Provides a basis for analyzing effects on
• Capacity and configuration
• Transaction costs

15
The Five Different Types of Access
16
The Impact of Different Types of Access

• Different effect on demand, which in turn affects
  optimal configuration and reliability
• Possible introduction of flows in core of network
• Differences in transaction costs/alteration of
  the natural boundaries of the firm
• Variations in the amount of network information
  outside each network providers control
• Opportunities for arbitrage created by the lack
  of a unified approach to access pricing