WASHINGTON D.C. - Networked industries rarely need regulatory intervention to ensure interconnection, conclude Richard Levine and Randolph May in "Interconnection Without Regulation: Lessons for Telecommunications Reform from Four Network Industries," a special report released today by The Progress & Freedom Foundation. By examining other network industries, Levine and May determine that there usually are sufficient economic incentives to ensure interconnection among operators without the need for regulatory intervention. The report is timely in that the Federal Communications Commission is reviewing interconnection rules and Congress is considering legislative proposals to reform communications law.

PFF Senior Fellow May and Adjunct Fellow Levine look at four networked industries: the Internet backbone, ATM networking, airline passenger interlining, and railroad freight interlining. All four of these market segments historically had different levels of regulatory involvement. The study examines "to what extent should we rely on the ordinary working of free market mechanisms rather than affirmative regulatory intervention to ensure that interconnection among network operators occurs in situations where such interconnection is necessary to enhance consumer welfare."

May, Director of Communications Policy Studies at PFF, and Levine, a director at the Law and Economics Consulting Group (LECG), conclude "the common lesson is that firms in network industries have economic incentives to assure that end users retain the ability to reach any 'destination,' without the need for regulatory intervention." They find "it is likely that interconnection among communications service providers will take place in an economically efficient manner on a privately negotiated basis, except in rare circumstances." In most cases, it is economically advantageous for firms to negotiate interconnection. Where it is most cost-effective to allow connectivity as opposed to building out a network, the involved firms will reach a voluntary agreement.

Among the market segments studied, the authors discovered a role for a regulatory response in only one instance, the case of the railroads. "Only where access to a specific customer is dominated by a single firm might the need for a targeted regulatory response arise," Levine and May explain. "In that instance, our study concludes that the response primarily should be to encourage the development of additional facilities-based competition."

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.