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Abstract

I present here a unique empirical analysis of the consumer welfare benefits of prior regulation in the mobile telecommunications industry. In particular, I analyze the relative consumer benefits of state rate regulation and federal entry regulation. The institution of filing requirements and FTC review and approval of various consumer pricing regimes is highly analogous to the consumer price controls imposed by various state level public utility commissions in the past. Furthermore, the imposition of a zero-price rule is analogous to past rate regulation; in particular it is similar to past wholesale regulation with its underlying principles of open access and interconnection rights to non-network competitors. Consumer welfare in this empirical analysis is defined in terms of consumer prices, not in express terms of innovation increases in the application and equipment markets. A motivating rationale behind the zero-price rule, and network neutrality regulation in general, is that each application provider should enjoy nondiscriminatory access to the Internet for the equal opportunity to compete for the attention of end users. Consumer prices offer a proxy for the size of the available network because as prices decrease subscribership typically increases. As the size of the network increases, the benefit of network effects (e.g., profit, reputation, and notoriety) increases and, therefore, the incentive for innovation by application and equipment innovators increases. My analysis is set forth as follows. Part I presents a brief overview of a few key elements of the network neutrality debate that have led to various proposals for direct or indirect price regulation. Part II presents an introduction to the mobile communications industry and describes the unique dataset I use. Part III sets forth the empirical model to test for the efficacy of past regulation, including consumer price regulation and wholesale "open access" pricing regulation, and presents the results. Specifically, price regulation, akin to proposed consumer price regulation and the zero-price rule, is shown to have had little or no benefit to consumers and may have harmed consumers in some instances. Moreover, even subjectively innocuous regulation is shown to have, at best, an ambiguous effect on consumer welfare. Comparable analysis of regulation increasing market entry suggests great consumer welfare benefits, indicating that regulation is best directed at encouraging increased competition rather than dictating specific network neutrality requirements to individual operators. Finally, the Conclusion sets forth the policy recommendations indicated by the empirical results.

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