Why the existing model doesnt work

We're supposed to be protected as consumers of communications services by there being a free market. The problem is, that a duopoly isn't a particularly efficient organization of a market defined by a natural monopoly.

Two modern economic models exist for the duopoly:

* The Cournot model, shows that two firms assume each other's output and treat this as a fixed amount, and produce in their own firm according to this.

* The Bertrand model, in which, in a game of two firms, each one of them will assume that the other will not change prices in response to its price cuts. When both firms use this logic, they will reach a Nash Equilibrium.

If we follow either model, and examine communications competition below the data-link-layer (Banerjee & Sirbu), we find a game with player A being the traditional copper telephone network and player B with the coaxial cable TV network. We find both players treating each other's output as fixed... hence the lack of significant investment in a more modern infrastructure. Telus and Shaw find little incentive to innovate unless both parties do and to the same degree.

"Notably, our simple calculation shows that if a 35-40% penetration is required for profitability, then in the long run at most two firms can profitably serve the same market."(Banerjee & Sirbu) This economic factuality addresses the often asked question of "if a new network would be so great, why has no one built it". A communications market (below the data link layer) can not sustain a market with enough players to achieve an economic equilibrium.

The Canadian public is placated by the competition that occurs above the data link layer by the illusion of choice. While you may be able to choose amongst a number of players for telephone service and internet access the competition is a bit of a sham.


And how does this affect our economy?


Lets examine a hypothetical small business with three locations that wishes to migrate from the traditional public telephone network to a IP Based communications platform. They have offices in three provinces with approximately 8 staff in each office. They expect that by modernizinig their communications systems they can achieve economic, environmental and efficiency gains in the following manner:

Video conferencing to cut down the number of trips that management must make across Canada saving money and reducing their carbon footprint. Further, the richness of the medium will afford better communications amongst their staff.

TBC









References:

Towards Technologically and Competitively Neutral
Fiber to the Home (FTTH) Infrastructure

Anupam Banerjee, Marvin Sirbu
Carnegie Mellon University
Pittsburgh, PA 15213 USA
anupam_banerjee@cmu.edu, sirbu@cmu.edu