Telecom Industry: Competition, Interconnection Requirements, and the Need for Regulations

The word 'competition' in economic terminology means the independence of business actions opted by different sellers of the same product. However, in context of the telecom industry, the same word has opposite connotation—interdependence among competing service providers. The reason is that "the telecom system must work as a single system [because] users desire end to end services within an apparently 'seamless' communication network. They want connectedness and connectability" [Melody (1997), p. 53]. Therefore, to attract users, a new entrant in the industry, while intending to compete with the incumbent monopoly operator, has to ensure interconnection arrangements with the latter. Another unique characteristic of this industry in a competitive set-up is that, initially, a new entrant always has a weaker bargaining position for an interconnection agreement with the incumbent operator. It is so because, in the first place, it is expensive and also inadvisable for the new entrant to build a parallel infrastructure up front. To test the market, the entrant may better pay for access privileges to the Public Switched Telephone Network (PSTN) and rent trunk lines from the incumbent Public Telecommunication Operator (PTO). Even if the new entrant builds a parallel infrastructure before he starts the service, he still has to go to the incumbent for interconnection privileges to attract subscribers for its service. If the incumbent operator simply denies interconnection, then most of the potential subscribers will most likely choose the incumbent operator, because they want to have access to more people on telephone.