Regulators have relaxed price regulation or eliminated them entirely on voice and video carrier (i.e., telephone companies, cable companies, wireless providers, etc.) in anticipation of lower prices.  While bundling of service by carriers has resulted in packages with savings for the underlying basic service and other products in the bundle, the price of the components of these bundles has generally risen faster than inflation.  In effect, bundling has created a regressive price increase for customers only able to afford services a la carte, and increased prices paid by all consumers overall.  Question: Given the characteristics of telecommunications networks, is it inevitable that allowing operators to sell bundled services will result in regressive pricing?

Determine whether permitting telecommunications providers and video providers to offer wide ranging bundles of services allows providers to raise prices on the individual basic prices and for bundles overall, rather than driving down prices as claimed by proponents of deregulation?

Proponents of deregulation have often argued that allowing telecommunications carriers freedom to offer services and bundles of services without regulation will lower prices and increase the services offered to consumers.  A recent study by the State of California following price deregulation of basic telephone service on this theory found that providers did, indeed, chose to offer more bundles and that these bundles did offer price savings on the services in the bundle, providers also raised the price of non-bundled basic services and of additional services not sold in bundles.  The effect was to impose a significant price increase on consumers too poor to afford bundles of services.  Further all consumers paid higher prices overall, because while the price of a bundle creates savings on the individual services (as compared to buying them as individual services), the price of the bundles is still higher than the cost of any individual service.

MAP staff believe that it is the economics of telecommunications networks that creates this regressive price increase (where those so poor they cannot afford a bundle pay the most for the service they can afford), and that therefore absent regulation or sufficiently high levels of competition (far higher than those currently thought sufficient by regulators) this regressive pricing will emerge.  The largest investment is in the basic ability of the network to carry traffic.  Basic transport of voice or data therefore carriers the lowest profit margin per customer, so carriers attempt to force consumers to take bundles that include services with much higher profit margins. 

Because the incentive to raise prices in this fashion falls equally on all market participants, it is unlikely that competition alone will prevent this regressive price scheme, as contended by proponents of deregulation.  In addition, adding bundles potentially increases switching costs to consumers, making them less able to switch and further lessening the ability of competition to protect lower-end consumers.  Finally, given the retreat by regulators from structural separation and mandatory access provisions to facilitate competition, the market is extremely difficult for new entrants to contest.  As a result, even if competition at a high enough level would force providers to accept lower profit margins by charging lower prices for basic service, it is unlikely that such competition will emerge.

The desired research will examine: (a) is the above theory supported by empirical evidence? (b) Can it be demonstrated to hold true in a sufficient number of cases to serve as an effective counter proof against the arguments for deregulation? (c) If so, what regulatory regime presents the optimum trade off between the eliminating regressive pricing and the benefits of bundling?

A communications or law journal article would be one appropriate output.  It is also important to provide one or more short-form versions that can be circulated in different policy contexts.

The project will require access to significant proprietary data to demonstrate patterns based on empirical data.  It will also require sophisticated software for data analysis, as well as considerable time spent on data entry.

MAP would like to have the materials ready to brief the incoming administration, new FCC, and new Congress following the election.  As a result, the deadline will be October 31, 2008.  This will allow MAP to use the research results in briefing materials designed for the winners.