Economic Model for Monopoly Analysis in Telecommunication Term Paper

Pages: 30 (14390 words)  ·  Bibliography Sources: ≈ 116  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business

¶ … Economic Model for Monopoly Analysis in Telecommunication:

Proposal to demonstrate Uniqueness. Mathematical Economic Model.

The Telecommunications Act of 1996 sought to end the monopoly that once existed in the telecommunications industry. Since its adoption, the telecommunications industry has been undergoing a period of rapid change and development. The entry of new players into the market encouraged them to seek new ways to attract and keep customers. These changes have led to a rapid influx of new technology and services.

Many times what defines a monopoly is not clear in every circumstance and there are many pending lawsuits for violations of Anti-trust laws in the courts today. Economic models are useful in resolving issues of whether a monopoly truly exists, or whether claims are unsubstantiated. Previous models were applicable only in certain situations. These models are unreliable in predicting monopolies outside the parameters for which they were designed. This research will evaluate and analyze economic models that could accurately predict the existence of a monopoly in the Telecommunications sector.


Rationale for Study

Scope of Problem

Statement of Hypothesis and Research Questions

Literature Review


Sample Population

Data Analysis



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Term Paper on Economic Model for Monopoly Analysis in Telecommunication: Assignment

Monopolies have been the subject of large amounts of media attention in recent years. Recently, there has been the question of whether Bill Gates constituted a monopoly, or whether his vast empire was a just and fair reward for good business savvy. There have been many questions regarding mergers and acquisitions of corporate giants would create a monopolistic environment, this creating an unfair advantage and virtually destroying any smaller companies that were unable to compete on their scale. Courts are flooded with cases such as these and surrounding all of these cases is one key question, "What exactly is a monopoly?"

Everyone is familiar with the textbook definition of a monopoly, that is, a marketplace where a lack of competition exists and one company controls all or a significant portion of the market place. A monopoly is only good for one entity, the monopoly itself. A lack of sufficient competition allows them to set their own prices and in some cases, no incentive to produce the best quality product available. If the product or service that the monopoly produces is necessary for life, then the customer has only one choice. They must take the product that is offered, and pay the price that is offered, especially if there is a lack of a sufficient substitute product.

Monopolies tend to drive up prices and have many negative effects on the establishment of a fair marketplace. One of the key issues surrounding the court cases regarding monopolies is that there are many different types of monopolies that exist for many different reasons. Some monopolies exist because of scale. In this case, the monopoly simply out-produces anyone else in the industry. They are price makers and everyone else must follow their lead. Because of their size, they can often produce goods cheaper than their competition and there fore can offer them at lower prices. Eventually, the smaller companies may be forced out of business and a true monopoly then exists.

Some monopolies exist due to location. This is particularly common in the telecommunications sector and other utility sectors. There may only be one service provider established in an area and the product may be necessary to life. Therefore a monopoly exists due to location. There are other more subtle forms and reasons for a monopoly existing, such as the effect that at a provider is the first to offer a service. They establish brand equity and name recognition. This may make entry into the market more difficult for the competition.

Monopolies may be complete, where the monopoly is the only provider and has complete control over the marketplace. The monopoly may be partial, where there is competition, but the monopoly retains a significantly large portion of the marketplace. A monopoly makes it difficult to enter into the marketplace. The more complete, the monopoly, the more difficult, entry into the market will be. However, in an incomplete monopoly, it is possible for the monopoly to drive prices up and consequently allow a lower priced competitor to steal a portion of the marketshare from the monopoly.

As one can see, there is not one hard and true definition of what constitutes a monopoly. The term "monopoly" has many shades and subtleties that make a hard definition a difficult task. There have been many mathematical economic models that have attempted to provide a legal definition by which the courts, businesses, and general public could use to classify whether a market is a monopoly or not. If this clear-cut definition existed, the courts would not be bogged with Anti-trust suits; there would be no argument. This is the purpose for the following research. This research will focus on the telecommunications industry and will examine models and their potential applications that will be useful in determining if a monopoly exists in the telecommunications industry. This model will be tested through empirical research.

Rationale for Study

Recent focus in the telecommunications industry has been on the cell phone sector and other new technologies such as broadband communication and other wireless services. However, the predecessor to this expansion in the telecommunications industry began with the Telecommunications Act of 1996. When this act was passed, there were eight major players who offered local telephone service: GTE and the seven "Baby Bells," the operating companies spun off from the old AT&T -- and five significant long-distance companies -- AT&T, MCI, Sprint, LDS WorldCom and Qwest. In only three years, these thirteen companies have merged into five telecommunications giants, in a series of record-breaking merger deals (McGaughlin, 1999).

With the aggressive deregulation in the telecommunications industry in the United States and Europe during the early to mid-1990's, it seemed that the local monopolies would be forced to unbundle their networks. However, MCI WorldCom, the second largest U.S. long distance telecommunications company, announced in October 1999, that it would acquire Sprint, the third largest U.S. long distance company, in the biggest corporate takeover in history to this time. The merger was valued at $129 billion in cash, stock and debt, making the new entity second only to AT&T in the U.S. telecommunications industry, a company with, as of 1999, $65 billion in annual revenue, 142,000 workers and 40 million business and residential customers (McGaughlin, 1999).

MCI WorldCom itself was formed from a $40 billion merger in 1998. It then outbid BellSouth to acquire Sprint. After reports began to surface of a combination of MCI WorldCom and Sprint, BellSouth jumped in with a $100 billion hostile takeover. This move compelled MCI WorldCom chief Bernard Ebbers to raise his offer to $115 billion in cash. This offer included $76 for each Sprint share, plus an additional $14 billion in stock, debt and deferred payments.

The enormous size of the combined company demonstrates the increasing monopolization of the telecommunications industry, nearly twenty years after the court-ordered breakup of the old AT&T monopoly. Since then, AT&T had 43% of the long distance market and the new MCI WorldCom-Sprint will have 37%, giving the two companies effective control (McGaughlin, 1999). As the landscape continued to evolve within the industry, more recently, SBC and Verizon both controlled greater than one third of the access in America. During the same time, SBC/Ameritech was hit with more than $1 billion in fines and penalties for a series of charges of anti-competitive behaviors over a six-year period. (Spiwak, 2002).

The passage of the Telecommunications Deregulation Act in 1996, with the bipartisan support of the Republican-controlled Congress and the Clinton administration, claimed that this law -- for which the telecommunications industry spent tens of millions in lobbying fees and campaign contributions -- would promote competition and lower costs to consumers. The result has been questionable. A major provision of the deregulation bill was to remove legal barriers to local and long distance phone companies acquiring each other, and the results were immediate and massive.

LDS WorldCom acquired MCI and now has acquired Sprint. Three of the Baby Bells -- Southwestern Bell, Pacific Telesis and Ameritech -- have been combined to form SBC Corp. Two more Baby Bells, Bell Atlantic and NYNEX, merged, and the new Bell Atlantic acquired GTE. Qwest acquired the smallest Baby Bell, U.S. West, and is now expected to merge with BellSouth, the last remaining independent Baby Bell, after BellSouth's failure to acquire Sprint. Meanwhile AT&T, which retains the lion's share of the long distance market, acquired two huge cable television and Internet access companies, TCI and MediaOne, as well as McCaw Communications, a leading cellular phone company. In each of these mergers, a vast corporate restructuring has followed in which telecommunications workers paid the price of consolidation through the loss of tens of thousands of jobs. The deal between MCI WorldCom and Sprint will be no different. Ebbers estimated that operating cost savings of $1.9 billion would be achievable by 2001, rising to $3.0 billion by 2004… [END OF PREVIEW] . . . READ MORE

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