Award Winning Blog

Friday, November 21, 2008

Demand Elasticity for ICE Services

The Wall Street Journal today reported that many electricity utilities in the United States have experienced an unexpected decline in demand, particularly from residential users. It comes as no surprise to me that even essential public utility services have some demand elasticity, i.e., consumption declines when consumers feel financially strapped. When one worries about job stability, or in my case coming up with a Cornell tuition, electricity consumption becomes one of many costs subject to greater scrutiny and conservation.

Does heightened scrutiny extend to information, communications and entertainment expenses particularly as companies providing these services experiment with new ways to extract greater compensation from high volume users? I think so, particularly for consumers being weaned off “all you can eat” unmetered service which has served as the predominant pricing model for Internet access.

In economics a concept called the “fallacy of consumption” warns that if many consumers start to reduce consumption service providers and consumers can become worse off. Internet service providers, keen on extracting surcharges from power users, have to consider the consequences that heavy volume users decide to throttle down on their consumption rather than pay more.

Similarly, it may come to pass that even recession resistant industries such as cable television and mobile telephony, may have to confront the possibility that they cannot raise rates without a reduction in subscribership or shift in service tiers. That said, this week I received a bill from my wireline local exchange carrier that noted a minor rate increase. One would think that wireline telephone companies, facing the triple threat of competition from cable operators, churn to wireless options and the poor economy would not opt to raise rates. Perhaps this telephone company banks on plenty of users displaying inelastic demand for such a traditional service.

Monday, November 17, 2008

Voodoo Economic Modeling and Telecom Policy

In my capacity as a university professor, one of the ways I serve “the academy” involves blind peer review of journal manuscripts. I also have the opportunity to read the academic literature. I marvel at the number of instances where someone—typically holding a PhD in economics—uses a model to rationalize a regulatory agency decision, or to quantify the harm resulting from an ill-advised initiative. The use of complex equations, complete with Greek symbols, attempts to legitimize any sort of bogus conclusion. Worse yet, far too many of these models did not arise out of an academic’s intellectually curious mind, but instead provides some scientific basis for a public policy outcome sought by a specific stakeholder who has financially sponsored the research.

This constitutes a corruption of academic research. The sponsored researcher does not disclose the direct sponsorship, e.g. payment, or the indirect process where a foundation, institute, or think tank receives funding that flows through to the researcher. In far too many instances notwithstanding some impressive math, the sponsored researcher concludes that a merger or acquisition will serve the public interest by “promoting competition.” Other researchers quantify the financial harm to the public or national treasury should the FCC do something or refrain from doing something.

Recently I have reviewed work that purports to quantify how much wireless subscribers benefit from access to subsidized handsets. I also have read a study that purports to quantify how much application of the wireless Carterfone policy would reduce carrier revenues, create disincentives for investment in new wireless infrastructure, promote further industry consolidation and reduce carrier profitability. Wow! Such big numbers all from a policy that I enthusiastically endorse, because it promotes competition among wireless carriers who cannot easily lock subscribers into a two year service commitment, and who cannot block subscribers from accessing content and software that competes with offerings of the carrier or a favored affiliate.

Both studies conveniently ignore counter arguments to their sponsor’s objective. In the case of subsidized handsets, seeing that wireless carriers do not operate as charities, might the carriers fully recoup the subsidy through the two year service commitment and the ability to charge rates in excess of what they would be if customers could more readily change carriers? In terms of the harm to the national treasury, carriers, and “innovation” the research conveniently ignores the public interest and individual consumer benefit in having access to more and different content, not just what the carrier’s “walled garden” offers. Might a substantial consumer welfare gain accrue when wireless consumers can buy cheaper and even used handsets and possibly force wireless carriers to offer cheaper service options for subscribers who trigger no handset subsidy obligation?

It has become painfully clear to me that if you see though the math equations, the sponsored researcher know what buttons to push a public policy initiative. These include:

Quantification of how many jobs a sought after initiative will create;

Estimates of how much money a change in regulatory policy will cost consumers;

Quantified claims that a change in policy will create disincentives for investment in $x billions; extra points for using the non-word incentivize; and

Estimates of how much money regulation will cost the sponsor, with no offsetting estimate of what consumer savings will accrue from more competition.

Let’s hope a new FCC will rely less on bogus, sponsored research to legitimize an preordained policy outcome.