Abstract

The recent popularity of the Internet and World Wide Web with both consumers and firms suggests that markets requiring telecommunications networks capable of interactive high-speed data transfers may emerge in the near future. In the past, virtually all networks, communications and others, have been subject to regulation by government agencies, and subject to various restrictions. Two reasons advanced for this market intervention are (i) the belief that such networks constitute a natural monopoly for which competition is not feasible, and (ii) to achieve "universal service," in which all (or most) citizens have access to network services. In this paper, we develop a model and estimate it using engineering data which tests whether or not these two hypotheses are like to obtain for interactive broadband networks. We find that some form of imperfect competition is likely to emerge for demand levels approaching that of today's cable TV. Further, in a dynamic model of competition, a "first mover" is likely to accelerate network investment in order to preempt competitors; a firm using this preemptive strategy will grow its network faster than a monopolist and (in some cases) faster than the socially optimal network deployment.

Keywords: economics of information, economics of networks, broadband, Internet, preemptive investment.
JEL classifications: L13, L51, L96