The document discusses natural monopolies, regulation, and the freemium business model in the telecommunications industry. It notes that telecom services exhibit network effects and economies of scale, making them prone to natural monopolies. As a result, regulation is needed to constrain monopolists and ensure sustainability. However, technological innovations and new business models like freemium challenge existing regulatory frameworks not designed for these models. Reform is needed to regulations to account for changes in market conditions and emergence of two-sided markets and freemium approaches.

1. Natural
monopoly, regulation, and
freemium
Toshiya Jitsuzumi, Dr.
Kyushu University

2. Fruits of the Market
Maximizing Maximizing
corporate consumers’
profits welfare
Without governmental intervention

3. Conditions for market dynamism
• Perfect/Sufficient Information
• Inclusiveness
• No externality
• No public goods
• Perfect Competition
http://www.dot-
communications.co.uk/assets/images/HeadersLogos
/terms_and_conditions.jpg

4. Features of the telecom industry
Network Effect
http://www.bourncreative.com/wp-
content/uploads/2012/09/capitalize-on-uniqueness.jpg Natural Monopoly

5. Prerequisites for telecom services
NTT-East
NTT-West

6. Prerequisites for telecom services
NTT-East
NTT-West

7. Fixed cost
Total Cost
Variable cost Average cost
Fixed cost
Output Output

8. Economies of Scale
Market demand curve
Average cost curve
Economies of scale Diseconomies of scale

9. Is “Natural Monopoly” naturally bad?
• Higher price?
• Inferior quality?
• Insufficient R&D?
• Less innovation?

10. Call for regulation
Because monopoly is the most efficient form
of production in network industries, regulation
should be designed to achieve an “efficient” or
a “least-harmful” monopoly.
• Price regulation to constrain the
monopolist’s greed
• Entry regulation to guarantee the
sustainability of the system

11. Needs for regulatory reform
• Changes in market conditions
• Increase in the market size
• Technological innovations
• New business models
• Confidence in the market mechanism
• Inefficiency of governmental intervention
• Expectation of technological breakthroughs
• Improvement of consumers’ literacy

12. New biz model
Recently, there emerges
a wide variety of
business models that
traditional regulations
cannot well deal with.
For example, “Freemium,”
which offers basic services
free of charge while charging
a premium for advanced
features, is not well fit within
the traditional regulatory
framework.

13. Two-sided market
Source: Eisenmann et al. (2006)

14. Freemium in the telecom sector