Essays on the Industrial Organization of Telecommunications and Network Industries

This dissertation is comprised of three essays on the industrial organization of telecommunications and network industries. In the first essay on the economic history of competition between US international cable telegraph and radiotelegraph carriers, we find that between 1919 and 1934 there was accommodated entry, collusive price policies, and strategic investments. The dominant cable telegraph operator faced capacity constraints and higher operating costs than the entrant that used radio technology. Because the entrant had lower costs, the incumbent accommodated entry into the US-Europe telegraph market. Since the main international cable and radio telegraph operators benefited from collusive price policies, they agreed, sustained, and enforced these policies. Lastly, in order to sustain a binding collusive agreement with the dominant radiotelegraph operator, the dominant cable operator invested heavily in excess traffic capacity. The second essay is an applied econometrics investigation on household choice of long-distance calling plans. We show that risk and uncertainty play significant roles in explaining household long-distance calling plan choices. High variability in calling patterns makes it difficult for callers to predict their future usage and therefore know which plan is cheapest across several months. Our findings show that there exists a bias against paying monthly fees for long-distance telephone service even when these fees are coupled with lower marginal rates. This bias against monthly fees is the opposite to the findings in several studies of consumer behavior in the local telephone service market. Finally, in the applied theory essay on bargaining mechanisms and network interconnection, we examine pricing strategies of network monopolists seeking two-way interconnection. While firms have monopoly power over the node they control, they will set interconnection tariffs equal to marginal costs when connecting to the network of a symmetric, or nearly symmetric, firm. In the case where firms are asymmetric, getting firms to set interconnection tariffs near marginal costs is a function of the bargaining protocol used to negotiate tariffs. We design a bargaining protocol that ,achieves weakly Pareto efficient and individually rational ·bargaining outcomes. In the empirical section of this essay, we find support for our hypotheses on the relationship between comparative firm size and efficient bargaining. Using interconnection tariff and traffic data for US international telecommunications carriers, we find the efficient bargaining frontier and characterized the firms with which US international telecom carriers are able to negotiate efficient interconnection tariffs.