The telecommunication industry is the fastest growing industry in almost every country. Both, technology advance in the telephony industry in general, and in the wireless technology in particular, as well as technology advance of the Internet contributed the most for the fast growth of this industry. Telecommunication services constitute the most natural example of network externalities, since by definition, the nature of these services involves communicating with a large number of people. For this reason, we devote Sections 5.1 and 5.2 to the construction of the demand for telecommunication services. This type of demand is heavily influenced by network externalities since the decision to buy a particular service is heavily affected by the number of other consumers connected to the same service. Section 5.3 demonstrates how modern regulators manage to maintain competition in industries where service providers must invest a large sum of money to develop the infrastructure for their services. We demonstrate that using access pricing, service providers can utilize each other's infrastructure thereby avoiding the inefficiency associated with multiple investment in the same infrastructure. Thus, this section demonstrates why regulators do not rely any more on the “natural monopoly” argument for licensing only a single provider (see a discussion on “natural monopolies” in Section 1.2.2).

Telecommunication Services

The demand for telecommunication services in general and telephony, facsimile, and e-mail services in particular exhibits perhaps the highest degree of network externalities. To see this, the reader should ask himself whether he is willing to subscribe to a phone (or an e-mail) service or buy a facsimile machine knowing that nobody else does.