Wireless Substitution and Competition: Different Technology but Similar Service–Redefining the Role of Telecommunications Regul

Executive Summary

In the absence of competition, regulations serve to protect consumers against monopoly market power.  This is, in theory, the reason why the telecommunications local exchange market is so heavily regulated.  While the days of the monopoly have long passed, when do policymakers know if there is enough competition to let markets operate without regulation?  The Federal Communications Commission (FCC) reports that competitive local exchange carriers (CLECs) now garner 16.3 percent of the market, leaving the remaining market share to the incumbent local exchange carriers (ILECs).   However, these statistics do not include competition from wireless telephones, high-speed data services, and Internet telephone services.  If wireless telephone services were found to be substitutes for traditional telephone services (referred to in this paper as wireline services), then this competition, not to mention competition from other technologies, would replace the need for the regulations that control the wireline incumbent’s prices and services.

The purpose of this paper is to examine the evidence on the degree to which wireless services are replacing wireline services.  In addition, this paper estimates the extent to which increases in wireline prices would affect wireless demand.  If wireless services are substitutes for wireline services, then an increase in wireline price should increase the demand for wireless services.  This paper will test if this, in fact, is the case.  A summary of the paper’s key findings is as follows:

• Wireless and wireline services target similar markets, provide similar consumer benefits, and are similarly priced.  Thus, wireless services can be suitable substitutes for traditional telephone services.

• In fact, overwhelming evidence shows that wireless services are replacing wireline services.  While wireless service demand is on the rise, wireline service demand – measured in terms of primary telephone lines, additional telephone lines and telephone usage – is declining.  For example, the Bureau of Census reports that wireless users are beginning to disconnect the wireline services into their homes.  Similarly, numerous reports suggest that many consumers consider their wireless telephone as their primary telephone.  There is also evidence that small businesses are beginning to use wireless services to replace traditional wireline services.  Today, three wireless subscribers are added for every telephone line lost. 

• Wireless services have become a widely accepted choice for consumer telecommunications needs.  For example, wireless services have gained widespread popularity among young consumers and those on college campuses.  For instance, one study suggested that college students using wireless services are more likely to use wireless services instead of wireline services after graduating. 

•  Based on an econometric model, this paper finds conclusive evidence that wireless and wireline services are substitutes.  This model finds that a one percent increase in wireline prices will result in a two percent increase in wireless demand.  In other words, there appears to be statistically significant evidence that wireless competition prevents wireline prices from rising excessively.  That suggests that market forces are at work.

• In addition to wireless services, intermodal competition is also taking shape in the form of 28 million high-speed service connections, as well as Voice-over-Internet Protocol (VoIP) that threaten to drive telephone rates lower.  The combination of wireless, high-speed and VoIP services makes traditional telephone services seem antiquated.    

In summary, this paper finds convincing empirical evidence that wireless services are strong substitutes for wireline services.  This fact has significant implications on competitive and regulatory policies.  For example, if wireline service providers cannot raise prices without causing significant line loss to wireless providers, then it can be concluded that wireline service providers are unable to exert market power.  Furthermore, as wireless prices continue to fall, wireline providers will be under increasing market pressure to follow suit, in order to stem market share losses.  That conclusion means that the nature of competition has changed, and it also means that price and service regulation is largely unneeded, since market forces are sufficient to hold prices in check.