16-02-2011, 01:13 PM
Introduction
In 1895, Guglielmo Marconi opened the way for modern wireless communications by transmitting the three-dot Morse code for the letter ‘S’ over a distance of three kilometers using electromagnetic waves. From this beginning, wireless communications has developed into a key element of modern society. From satellite transmission, radio and television broadcasting to the now ubiquitous mobile telephone, wireless communications has revolutionized the way societies function.
This chapter surveys the economics literature on wireless communications. Wireless communications and the economic goods and services that utilise it have some special characteristics that have motivated specialised studies. First, wireless communications relies on a scarce resource – namely, radio spectrum – the property rights for which were traditionally vested with the state. In order to foster the development of wireless communications (including telephony and broadcasting) those assets were privatised. Second, use of spectrum for wireless communications required the development of key complementary technologies; especially those that allowed higher frequencies to be utilised more efficiently. Finally, because of its special nature, the efficient use of spectrum required the coordinated development of standards. Those standards in turn played a critical role in the diffusion of technologies that relied on spectrum use.
In large part our chapter focuses on wireless telephony rather than broadcasting and other uses of spectrum (e.g., telemetry and biomedical services). Specifically, the economics literature on that industry has focused on factors driving the diffusion of wireless telecommunication technologies and on the nature of network pricing regulation and competition in the industry. By focusing on the economic literature, this chapter complements other surveys in this Handbook. Hausman (2002) focuses on technological and policy developments in mobile telephony rather than economic research per se. Cramton (2002) provides a survey of the theory and practice of spectrum auctions used for privatisation. Armstrong (2002a) and Noam (2002) consider general issues regarding network interconnection and access pricing while Woroch (2002) investigates the potential for wireless technologies as a substitute for local fixed line telephony. Finally, Liebowitz and Margolis (2002) provide a general survey of the economics literature on network effects. In contrast, we focus here solely on the economic literature on the mobile telephony industry.
The outline for this chapter is as follows. The next section provides background information regarding the adoption of wireless communication technologies. Section 3 then considers the economic issues associated with mobile telephony including spectrum allocation and standards. Section 4 surveys recent economic studies of the diffusion of mobile telephony. Finally, section 5 reviews issues of regulation and competition; in particular, the need for and principles behind access pricing for mobile phone networks.
Background
Marconi’s pioneering work quickly led to variety of commercial and government (particularly military) developments and innovations. In the early 1900s, voice and then music was transmitted and modern radio was born. By 1920, commercial radio had been established with Detroit station WWJ and KDKA in Pittsburgh. Wireless telegraphy was
first used by the British military in South Africa in 1900 during the Anglo-Boer war. The British navy used equipment supplied by Marconi to communicate between ships in Delagoa Bay. Shipping was a major early client for wireless telegraphy and wireless was standard for shipping by the time the Titanic issued its radio distress calls in 1912.1
Early on, it was quickly recognized that international coordination was required for wireless communication to be effective. This coordination involved two features. First, the potential for interference in radio transmissions meant that at least local coordination was needed to avoid the transmission of conflicting signals. Secondly, with spectrum to be used for international communications and areas such as maritime safety and navigation, coordination was necessary between countries to guarantee consistency in approach to these services. This drove government intervention to ensure the coordinated allocation of radio spectrum.
2.1 Spectrum Allocation
Radio transmission involves the use of part of the electromagnetic spectrum. Electromagnetic energy is transmitted in different frequencies and the properties of the energy depend on the frequency. For example, visible light has a frequency between 4×1014 and 7.5×1014 Hz.2 Ultra violet radiation, X-rays and gamma rays have higher frequencies (or equivalently a shorter wave length) while infrared radiation, microwaves and radio waves have lower frequencies (longer wavelengths). The radio frequency spectrum involves electromagnetic radiation with frequencies between 3000 Hz and 300 GHz.3
Even within the radio spectrum, different frequencies have different properties. As Cave (2001) notes, the higher the frequency, the shorter the distance the signal will travel, but the greater the capacity of the signal to carry data. The tasks of internationally coordinating the use of radio spectrum, managing interference and setting global standards are undertaken by the International Telecommunication Union (ITU). The ITU was created by the International Telecommunications Convention in 1947 but has predecessors dating back to approximately 1865.4 It is a specialist agency of the United Nations with over 180 members.
The Radiocommunication Sector of the ITU coordinates global spectrum use through the Radio Regulations. These regulations were first put in place at the 1906 Berlin International Radiotelegraph Conference. Allocation of the radio spectrum occurs along three dimensions – the frequency, the geographic location and the priority of the user with regards to interference. The radio spectrum is broken into eight frequency bands, ranging from Very Low Frequency (3 to 30 kHz) up to Extremely High Frequency (30 to 300 GHz). Geographically, the world is also divided into three regions. The ITU then allocates certain frequencies for specific uses on either a worldwide or a regional basis. Individual countries may then further allocate frequencies within the ITU international allocation. For example, in the United States, the Federal Communications Commission’s (FCC’s) table of frequency allocations is derived from both the international table of allocations and U.S. allocations. Users are broken in to primary and
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