More Operators Does Not Always Mean Lower Rates in Wireless Communications Market

While Congress is working on legislation to empower the FCC to hold voluntary incentive auctions to facilitate the transfer spectrum from broadcasters to mobile carriers, a new study released by Phoenix Center, entitled “Wireless Competition Under Spectrum Exhaust” indicates that in the face of spectrum exhaust for commercial mobile services, policies which impede incumbent carriers from acquiring more spectrum, via either auction or acquisition, may do more harm rather than good.

The study shows that in most policy debates, it is generally presumed that there is a direct relationship between the number of firms and market performance -- i.e., prices fall as the number of firms increase and, conversely, that prices rise as markets become more concentrated.

However, Phoenix Center's new study shows that conventional wisdom may be misleading. Interestingly, the analysis suggests that the addition of a spectrum constraint to the traditional economic model of competition turns the conventional view of wireless competition on its head. The Phoenix Center’ study shows that under a binding spectrum constraint, a reduction in the number of firms will produce lower prices and possibly increase sector investment and employment.

With more firms, total industry capacity is lower, so that rising demand must be rationed with higher prices. As a result, the Phoenix Center's economic analysis shows that the market participation restrictions championed by FCC chairman Julius Genachowski (and others) are unlikely to be welfare enhancing.

In a statement, study co-author and Phoenix Center president Lawrence J. Spiwak said, "No one has formally studied how spectrum shortages affect competition in wireless communications. Our study is the first, and its findings are significant."  He added, "If mobile carriers have too little spectrum, then the standard view that more competitors leads to lower prices is precisely backwards. Clearly, policymakers need to re-orientate their thinking about competition in the wireless industry."

In another statement, chief economist of the Phoenix Center and co-author of the paper, George S. Ford commented, “The economics of the wireless industry are highly complex, and understanding how key industry trends affect market outcomes is essential to good policymaking. We hope this study leads policymakers, and those that seek to influence them, to strongly question the boilerplate economic analysis that too often leads to poor policy prescriptions in communications markets."

Besides Spiwak and Ford, other co-authors of the paper include Phoenix Center Senior Fellows and Auburn University Professors of Economics T. Randolph Beard and Michael Stern.