Information Technology Reference
In-Depth Information
Chapter 5
Broadband and Structural
Separation from the Perspective
of Transaction Cost Economics
Hidenori Fuke
Komazawa University, Japan
ABSTRACT
Conduct regulation and structural separation are often discussed in industrial organisation studies as
options to prevent the abuse of market power by vertically integrated firms toward the downstream mar-
ket. Both the structural separation of NTT and conduct regulation have been discussed in the Japanese
telecommunications industry since the introduction of competition in 1985 and the issue is still being
discussed, although the industry is going through a transition from POTS (Plain Old Telephone Service)
to the broadband internet. Past discussions have been inclined toward elimination of the harmful effects
of vertical integration. However, there is a benefit of vertical integration in the sense that it will promote
the efficient management of the firm concerned. I will present a new contention that it is important to
conclude a balanced analysis of costs and benefits of vertical integration based on transaction cost
theory. Structural separation in the broadband market entails significant transaction costs between a
carrier with access facilities and firms offering broadband services by renting these facilities as input.
These kinds of transaction costs are comparatively negligible in POTS. I will make it clear that the bal-
ance analysis of costs and benefits of structural separation has become more important in broadband
than in POTS based on the actual differences in network structure.
INTRODUCTION
possible abuse of market power toward the down-
stream market by a vertically integrated firm that
is operating in both upstream and downstream
markets and is offering goods or services to down-
stream competitors as a monopolistic supplier.
This is discussed not only in the case of a merger
of a firm that has market power in the upstream
Vertical Integration is one of the topics that have
been much discussed in industrial organisation
studies. The focus of the discussion here is the
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