Jerry Hausman, MIT

Whereas current regulations of traditional landline telephone services aim to promote competition among providers, according to Jerry Hausman, third-generation wireless services (3G) should offer enough competition to landline offerings to render such regulation moot.

Hausman, the John and Jennie S. MacDonald Professor of Economics at the Massachusetts Institute of Technology, based his April 23 lecture at AEI on his study "From 2G to 3G: Wireless Competition for Internet Related Services."

Use of mobile phones has become increasingly common and affordable since they were first introduced in the United States in 1983. The first generation of cellular technology was analog service, which used radio transmission similar to that used on wireline networks. This service was limited to voice calls, and only two providers existed in each service area.

In 1996, the second generation of cellular technology became available in the United States. Voice quality improved markedly, and new fax and messaging capabilities were added. Also, consumers could choose among at least five mobile providers in most locations.

Both previous generations used circuit technology, which limited the speed at which data could be transmitted. Today, service providers employ a hybrid of circuit and packet-switching technology, which allows for higher speeds through broadband.

The next generation of wireless service, 3G, will use only packet-switching technology. Most 3G applications will likely be Internet-based, allowing for video, audio, web browsing, file transfer, and home automation. 3G, which is beginning to be deployed outside the United States, will also feature easier connections from mobile phones to laptops and handheld devices.

In the past, the Federal Communications Commission has enacted regulations to keep wireline carriers from distorting competition, a phenomenon that came to a head with the AT&T divestiture in 1984. Hausman argued, however, that instead of correcting a market failure, regulatory policies have favored certain competitors.

As cellular services have become more popular and sophisticated in America, they have become more competitive with landline services. In addition to the obvious benefit of portability, Hausman pointed to important strengths of mobile phones: Voice quality is nearly equal to wireline phones; they allow users to have a single phone number that can be taken anywhere; and the costs are rapidly decreasing. He also acknowledged that cellular phones are not competitive in one key area-Internet service. It is still too slow, but this may change.

Mobile phones are now nearly as widespread as traditional ones. Hausman said mobile phones are likely to become increasingly competitive: "Mobile prices do not have to fall too much farther before they could begin to have a significant substitution effect on landline telephone usage. Indeed, in a number of countries mobile usage has begun to supplant wireline subscriptions." The new 3G phones may spur that conversion because they will offer high-speed Internet access.

In Hausman's view, this new technology may well have revolutionary effects on regulation: "3G cellular, which will be largely unregulated by the government, has the potential to [rectify] . . . the severe economic distortions caused by telecommunications regulation in the United States."

The removal of regulation would significantly benefit consumers. Nevertheless, even if regulation becomes redundant, it will not disappear without a struggle. "The process could be lengthy and contentious," Hausman warned, "as the lawyers will need to collect their tolls, but the end of regulation may be a glimmer on the horizon with gains to the economy in the tens of billions of dollars per year."