The Special Problem of Special Access: Consumer Overcharges and Telephone Company Excess Profits

As digital technology spreads through society, the communications sector and the Internet become the core of the digital economy. The size and importance of communications grows dramatically. Many activities that took place in physical space now take place in cyberspace and are dependent on communications. By substituting communications as an intermediate factor of production for physical transportation transaction costs are lowered, increasing economic efficiency. Those, intermediate goods or services are consumed by businesses to produce the goods and services they sell to the public.

Digital communications are not free, however. They have significant costs. The cost of those intermediate goods and services are recovered from consumers in the prices they pay for everything they buy. Today, special access is a $40 billion per year business. This paper shows that about half of the total bill paid to the large incumbent local phone companies for special access service, who control between five-sixths and nine-tenths of the special access market, is the result of the abuse of market power – i.e. setting prices far above costs to earn excess profits.