The Effect of Technological Change and Regulation on the Evolution of the New Zealand Telecommunications Market

The absence of industry specific regulation of access to the incumbent'stelecommunications network in New Zealand for an extended period, between1989 and 2001, is unique compared with other countries with developedtelecommunications markets that were opened to competitive entry. This featureof the New Zealand market provides an opportunity to compare the conduct andperformance of antitrust regulation with industry specific regulation introducedin 2001.

Of particular interest is the place of the concepts of natural monopoly andperfect competition in the regulation of a dynamic market. This thesisestablishes the characteristics that contribute to dynamic supply and demandconditions in the telecommunications market including network effects,discontinuity in demand due to participation, ongoing technological progress ofhardware, sunk costs of software development, and the irreversible investmentof augmenting capacity to meet expected growth in demand. The economicliterature on conjectural variations indicates that under such conditions theconcepts of natural monopoly and perfect competition do not explaincompetitive conduct due to an unstable market equilibrium. The implication isthat forming a reasonable view of competitive conduct is limited to the presentperiod of time.

It is shown that decisions made under antitrust regulation are limited to theparticular context of disputed competitive conduct, and these decisions do notspeculate on future competitive conduct. In contrast, industry specific regulationhas formed a sequence of views of competitive conduct, looking forward, that isbased on concepts of natural monopoly and perfect competition. It is observedthat with time, these views of competitive conduct have evolved with thechanging market conditions. If regulatory actions evolve with a changing view ofcompetitive conduct they risk reducing dynamic efficiency.