Monday, January 31, 2005 - The Progress & Freedom Foundation Blog

The Merger: Room for Coase-ian Optimism on Intercarrier Comp?

One peculiar benefit of the AT&T/SBC merger might be a firm with better incentives to work out the seemingly intractable problems of intercarrier compensation reform.

Ronald Coase famously in The Nature of the Firm noted that markets and firms were different ways to organize economic activity, and that the decision whether to organize hierarchically in a firm or use the price system in markets depends on transaction costs. Another determinant that influences integration into a firm is when the price system breaks down. With intercarrier compensation, we have a variation on that theme, where the price system has been distorted and communicates "false" signals to the market. By integrating two firms on opposite sides of that broken price system (SBC and AT&T), you create the internal incentives for the merged entity to work out intercarrier compensation transitions.

Of course, you are not in a perfect world of Coase-ian integration because regulators and third-parties (particularly rural carriers) are reliant on the current system and will be affected by any reforms the merged entity might arrive at. Nonetheless, with the merger, you do create a firm with better incentives to work these issues out.

posted by Ray Gifford @ 10:02 AM | Communications