Economic Efficiency of the Deregulation of Telecommunications Market

This paper examines the theoretical aspects of telecommunications market in Japan. The market has been developed through monopolistic supply by Nippon Telegraph and Telephone Public Corporation (NTTPC), which is now privatized and named Nippon Telegraph and Telephone Co. Ltd., (NTT). After privatization, three market competitors entered the supply of trunk line telecommunications services. They provide alternative services by leasing NTT’s terminal facilities. However, charges for long-distance calls have not been so lowered as much as were expected. Focusing on economic explanation and interpretation of the pricing of long-distance telecommunications in Japan, optimal two-part tariffs of the utility supplier faced with market contestants are designed in the context of the privatization of NTTPC, the entry of competitive firms and the innovation of relevant technology. Demand externalities, which are important for the economic analysis of telecommunications, are explicitly introduced. Optimal two-part tariffs are derived through (i) profit-maximizing, (ii) welfare maximizing, (iii) profit-constrained welfare maximizing formulae.