March 3rd, 2009

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Link Harvest: What Caused Cell Phone Growth?

David Gross, former Ambassador on telecom issues at State, makes the standard case for the wonders of deregulation, citing the dramatic rise in cell phone use as evidence.

This is the classic problem of the simplistic paradigm pushed by the Chicago School and its acolytes (many of whom have never cracked an econ textbook in their lives). Certainly FCC regulation of the cell phone industry prior to the early 1990s was a disaster for the technology. It was a classic case of industry capture -- in this case by AT&T and later the baby bells -- who did everything they could to keep wireless from becoming a threat to their landline business, to exact ridiculous fees from new entrants, and to capture the best spectrum for free before we shifted to auctions.

But to pretend that the wholesale deregulation that followed produced the best of all possible worlds is rather ingenuous. It also falls into the classic trap of judging a market in its growth stage rather than anticipating what happens when the market reaches maturity. The policies needed for the period of rapid growth and significant competition are very different from those needed in the modern market in which nearly everyone (in this country) who wants a cell phone has one and the dynamics of competition work differently.

Granted what Gross is really worried about is rate regulation. But even here, a little sensibility is in order. Policy needs to consider that -- in the U.S. and in much of the world -- the dominant cellular companies are vertically integrated with the dominant landline companies and this impacts both retail and wholesale pricing.

One could charitably read Gross as simply injecting a needed note of caution about the pendulum swinging too far. But the pendulum has hardly swung at all, and those of us in policyland recognize the usual arguments against needed regulatory oversight. Rather than fret about "too much" or "to little" regulation, why not figure out what needs to happen, then do it?