Market separation and market performance in telecommunications industry

Abstract

In recent US telecommunications industry telecommunications service operators suffered from less profitability and they were getting back to the consolidation, the situation before the 1984 AT&T divestiture. Since 1984 the local and long-distance service market were separated in a monopoly condition and a competitive condition till 1996 when new Telecommunications Act was established. The market separation regulation made it difficult for telecommunications service operators to adapt themselves to the rapidly changing environment. This means that the induced market structure limits the flexibility of service operators, particularly under the emergence of new services. For instance, it leads to lower the degree of product and price differentiation and increases a transaction cost. As a result, it leads to make higher price, lower quality and profitability, and finally to lower market performance. In contrast the Korea telecommunications industry did not experience market separation and hence service operators benefited from various integration effects. From these experiences of two countries, the growth rate in the Korea telecommunications industry is higher than in the US and the difference of average growth rate between the US and Korea during maintaining the market separation regulation is bigger than during abolishing this regulation. In comparison with representative service operators, KT in Korea is in the higher degree of diversification than AT&T and has the higher growth rate than AT&T and BellSouth in the US. Namely, the restriction of the flexibility of business operations of telecommunications service operators by the market separation regulation results in a decline of revenues of individual firms and finally the decrease of the growth rate of the telecommunications industry. This paper concerns about that how market separation influences on market performance in the telecommunications industry by comparing two countries, US and Korea. We may conclu...