The role of markets and reasons for their failure, and in the information and communications technologies arena, the affects of innovation and convergence on market structure, and the relative importance of market failure and social responsibility as reasons for regulating (2005)

In this essay, first, I will discuss the role of markets and reasons for failure, second, in the ICT arena, the affects of innovation and convergence on market structures and third, I will evaluate the relative importance of market failure and social responsibility as reasons for regulating. I shall do so by referring to primary and secondary empirical evidence and will conclude by summarising the main points.

A market economy is a market system characterised by decentralised decision-taking, contrasting with a command economy or centrally planned economy, where ‘economic behaviour is determined by some central authority’ (Lipsey & Chrystal 1995:11).

In a market economy, the allocation of resources is the outcome of millions of independent decisions made by consumers and producers, all acting through the medium of markets’ (ibid. 1995:18).

The essential features of a market are that it coordinates buyer and seller in a mutual discourse of exchanges of goods and services, at an agreed price, between actors who may be ‘widely dispersed and […] entirely unaware of each other’s existence’ (Levačić 1991:21 a). These actors can be described as individuals, firms and government (Lipsey & Chrystal 1995:62).

The fundamental mechanism of a market rests on the ‘laws’ of demand and supply. ‘Quantity demanded’ is the volume of a product or service that consumers desire and are able to purchase. Consumers are motivated by satisfaction, utility or well-being. An assumption of economic theory is that quantity demanded is negatively related to price, if all else is equal (Lipsey & Chrystal 1995:62-63). ‘Quantity supplied’ is the volume of a product or service that enterprises are capable and willing to make available for sale. Enterprises are motivated by profit maximisation. An assumption here is that quantity supplied is positively related to market price (ibid. 1995:70).

The role of markets is to optimally allocate resources for social benefit. Allocation of resources concerns the type and value of goods and services, production methods used and the manner in which income is distributed (Levačić 1991 a:21-22). Allocative efficiency is achieved when ‘no one can be made better off without at least one person being made worse off’ (Frances et al. 1991:6). The market conditions or structure1 under which this is accomplished can be theorised as ‘perfect competition’. A perfectly competitive market is constituted by so many buyers and sellers, that individually they have no control of market price (Levačić 1991 a:21-22). This is because price is determined by the aggregate market conditions resulting from total supply and demand. Any fluctuation of individual output will not affect the market price, as each company contributes a small percentage to total output (Pass & Lowes 1993:399). So, the market price is a corollary of decisions made by actors in the market through knowledge of the ‘prevailing price’ (Levačić 1991 a:21-22). This setting of price by the market itself is often described as an ‘invisible hand’, the ‘automatic equilibrating mechanism’ that ‘maximizes individual welfare and economic efficiency’ as expounded by Adam Smith (Pass & Lowes 1993:497). Allocative efficiency is only achieved if perfect competition prevails throughout every market in the economy (Lipsey & Chrystal 1995:297). As perfect competition is nonexistent in practice, optimal allocation of resources is not achieved and thus market failure occurs2 (Levačić 1991 a:22).

Often, the ‘primary rationale for regulation […] is to remedy various kinds of market failure’ (Vickers 1991:163). Baldwin and Cave refer to Selznick and assert that an all encompassing definition of regulation is the ‘sustained and focused control exercised by a public agency over activities that are valued by a community’. They expand this and delineate three increasingly broad notions of regulation. First, as a ‘specific set of commands’, that is, a set of binding rules or laws, promulgated by a government or through delegation to a proxy agency (Baldwin & Cave 1999:2). For example, the Office of Communications (OFCOM), the regulatory body for ‘the UK communications industries’, oversees the application of the Communications Act 2003 (OFCOM 2004 a:1). Second, as ‘deliberate state influence’, a definition which embodies the use of a variety of mechanisms of influence, based on economic incentives such as taxes and subsidies, as well as other incentives such as information supply. Third, as ‘all forms of social control or influence’, where any device influencing behaviour, either through the state or from markets, for example, is viewed as regulatory (Baldwin & Cave 1999:2).

Regulation is essentially the use of a set of policy instruments or rules that can disable or enable certain behaviour, in an attempt to achieve economic objectives such as allocative efficiency as well as other social objectives such as distribution of income and wealth (Lipsey & Harbury 1988:270,274) and promotion of shared values for example (Baldwin & Cave 1999:15). Government intervention through regulation can often be thought of in terms of public interest, to maximise welfare. Theories such as ‘public interest’, ‘interest group’ and ‘private interest’ can be used to explain how regulation ‘arises, develops and declines’. In the public interest approach, advocates of regulation propose that its objective is to result in public benefit, in situations where, for example, the market fails to provide this benefit (Baldwin & Cave 1999:18-19).

Market failure can occur for several principal reasons, which will be discussed in turn, together with concomitant rationales for regulatory intervention.

Monopoly is a commonly cited reason for market failure. A monopoly is a market structure in which ‘one seller produces for the entire industry or market’ (Baldwin & Cave 1999:9). Here, market failure is through deficient competition and in contrast to perfect competition, results in ‘reduced output, higher prices, and transfer of income from consumers to producers’. This is the perceived problem in terms of public interest. A monopoly situation occurs when three conditions persist. First, only one seller exists in a market, second, the ‘product is unique’ in that no other product can satisfactorily replace it and third, barriers prevent easy entry and exit to the market for other firms (ibid. 1999:10). Barriers to entry prevent other companies from entering a market, allowing incumbent3 firms to earn ‘above-normal profits’ through reduced competition. These barriers include the prohibitive expensive for entrants, established market share, extensive economies of scale4, control of technology, raw materials and patents for example (Pass & Lowes 1993:36). Also, government can regulate to grant monopoly status to firms (Lipsey & Harbury 1988:271). Barriers to exit can also discourage entry to a market (Gattuso 2002:2). Barriers to exit prevent a firm leaving an industry or market, even when these are in decline. One factor is expensive, non-saleable specialised assets, such as might be found in semiconductor production (Pass & Lowes 1993:36).

Closely related to monopoly is monopoly power. For example, Microsoft does not hold monopoly status in the operating system market (Levy 1998:8), as it competes with Apple and Linux for example, but it does have monopoly power. This is interpreted from the Sherman Act as ‘the power to control prices or exclude competition’. In practical terms, according to Steuer, monopoly power is assessed by measuring a company’s share of the ‘relevant market’ (Steuer 2005:2). An example of monopoly power can be seen in the interconnection of telecommunication networks, where an incumbent operator owns a network and for competitive purposes restricts connection to other networks (dot-GOV no date available:1). OFCOM illustrates this in its ‘ Review of the wholesale local access market’, concerning broadband provision through local loops. The review discovered that British Telecom (BT) had ‘significant market power’ in the ‘relevant market’ (OFCOM 2004 b:4,8) and one of OFCOM’s regulatory options was to force BT to ‘provide Network Access on reasonable request’. It can be seen that insurgent operators, such as ‘Wanadoo’ and ‘Bulldog’, require regulatory intervention in order to remove barriers to entry. This facilitates movement towards a ‘level playing field’ and therefore increases competition and choice (ibid. 2004:52,90).

Monopoly power can be retained by the use of anti-competitive practice. This is where competition exists but the conduct of an enterprise is not ‘conducive to healthy competition’. A primary manifestation of this is ‘predatory pricing’, where a company attempts to set the market price below their cost price, in an attempt to drive competitors out of the market. If successful, it will utilise its dominant market power to recover predation costs (Baldwin & Cave 1999:13).

Another form of anti-competitive practice is ‘tying’, of which Microsoft has a well-documented history. ‘Horizontal tying’ is when one product is ‘tied’ to another, through purchase of the first (Wikipedia 2005 a:1). Microsoft was found guilty of attempting to monopolise the web-browser market and it was ruled that ‘Microsoft's decision to tie Internet Explorer to Windows cannot truly be explained as an attempt to benefit consumers’, but as an abuse of its monopoly power to ‘quash innovation that threatened its monopoly position’ (Jackson cited in BBC 2000:4,5).

Baldwin and Cave assert that one resolution in a monopoly situation is implementation of ‘anti-trust’ or ‘competition’ laws, rather than regulation. These are ‘market-harnessing controls’, a ‘light-handed’ form of control which aims to nurture competition in a market (Baldwin & Cave 1999:10,44). However, in the context of a ‘natural monopoly’, these laws may be unsuitable. A natural monopoly is a market structure that is ‘inherently monopolistic’ (Levačić 1991 b:42), in that the processes of production are characterised by extensive economies of scale, to the degree that a market is optimally served by one firm and as such competition may be ‘socially costly’ (Baldwin & Cave 1999:10). Natural monopolies are often associated with network industries such as telecommunications infrastructure (Levačić 1991 b:42). Here, regulation may be used to control prices, output, quality and access. Often, regulatory ambit includes identification and definition of elements of an industry that are naturally monopolistic, which require regulation, and those which can be ‘left to the influence of competitive forces’ (Baldwin & Cave 1999:10-11).

‘Externalities’ are another form of market failure. These are social effects, either positive or negative, that are external or ‘hidden’ from the price of a commodity (Lipsey & Chrystal 1995:421). For example, environmentalists have protested against Intel’s expansion of its plant in County Kildare, Ireland, alleging that during semiconductor fabrication, ‘Intel discharges many tons of fine particulates, toxic gases and carcinogenic solvents into the atmosphere’ (Thomas 2000:1). If this were the case, regulation would be required to ensure that ‘clean-up costs’ are reflected in the market price, otherwise excessive consumption could result (Baldwin & Cave 1999:11). That is to say that, demand is higher than if the market price reflected the ‘true’ societal cost (Levačić 1991 b:36). Here, market failure results from wasteful resource allocation, as too high a proportion of resources is ‘attracted into polluting activities’ and therefore, the ‘best’ outcome for society is not achieved. Regulation aids internalisation of this cost to the polluter (Baldwin & Cave 1999:11-12). In the example cited here, the UK ’s Environmental Protection Agency, which ‘is responsible for regulating activities that have significant polluting potential’, uses ‘Integrated Pollution Prevention and Control’ licensing as one tool to regulate such activities(EPA 2004:1). This is a ‘market-harnessing control’ that may use a system of ‘tradeable permits’ to allow companies to discharge an agreed volume of pollution (Baldwin & Cave 1999:47). According to Freeman and Oldham , environmental damage is the ‘biggest single example of market failure’ (Freeman & Oldham 1991:4).

Another form of externalities is ‘public goods’ (Baldwin & Cave 1999:13-14). A public good is one that is ‘non-excludable’, in that anyone can consume it and it is ‘non-rivalrous’, that is, consumption by one individual has no effect on the ability of another to consume. Here, there is a social effect external to the market price (Levačić 1991 b:36-39), as production costs are fixed, even with an increase of consumers. Markets fail as there is no incentive to produce such commodities, as once produced, it is ‘inefficient or impossible’ to enforce payment for them (Lipsey & Chrystal 1995:421). An example is public service television and radio broadcasting, as provided by the BBC. Once programmes are produced, they are potentially valuable to all receivers, as it is ‘difficult to exclude consumers once they have reception equipment’. This underlies the ‘free-rider’ problem, as the public can benefit from broadcast without payment. However, broadcasting is financed by the private sector through a licensing system for the BBC and advertising for independent broadcasters. For the BBC, free-riders are deterred by legal prosecution (Levačić 1991 b:39-41).

From a supply perspective of transmission, the electromagnetic spectrum is a ‘common good’, one which is ‘non-excludable’, as anyone can transmit a signal and it is ‘rivalrous’ as there is limited bandwidth for transmission (Levačić 1991 b:37-41). ‘S carcity and rationing’ underpin regulation here, as markets are unable to efficiently allocate the electromagnetic spectrum (Baldwin & Cave 1999:14). A regulatory body is required to allocate ‘frequencies according to the characteristics and the demand for the services’ (Baldwin et al. 1996:40). For UK radio spectrum, there are market mechanisms such as auction of spectrum licences, but if incentives are not offered, ‘hoarding’ and ‘shortage’ can manifest (Cave 2002:37,103). This approach to regulation can be viewed as a ‘less-restrictive’ form of regulation, in this case, licensing through a ‘market-harnessing control’ of franchise. A franchise gives successful applicants the right to perform an activity. These applicants compete ‘for the market’ rather than ‘in the market’ (Baldwin & Cave 1999:44,56,257-258).

‘Information inadequacies’ may also lead to market failure, if consumers are ill-informed or not in a position to adequately assess vying products (Baldwin & Cave 1999:12). Webster considers the work of Herbert Schiller and asserts that ‘the fundamental shaper of the informational domain is the market imperative at the heart of capitalist enterprise’ (Webster 2002:141). Corporate self-interest would limit information generation, as it is costly and could benefit competitors. Furthermore, revealing information about products or processes could jeopardise reputation and there may be a temptation to falsify or omit information. Also, collusion between companies in the market can restrict the useful flow of information to the consumer. Regulation attempts to ameliorate these problems by enforcing disclosure of information for example (Baldwin & Cave 1999:11-12).

In macroeconomic terms, market failure can be viewed as a function of more widespread economic failure. According to Castells, by the 1980s, capitalism, specifically in the G-7 countries undertook ‘a substantial process of economic and organizational restructuring, in which new information technology played a fundamental role and was decisively shaped by the role it played’ (Castells 2000:60). In part, this was prompted by a worldwide economic crisis during the 1970s. One dimension of this restructuring was an increased volume of international business, as economic volatility and turbulence led enterprises to develop new markets in order to ‘compensate for domestic uncertainty’ (Hirst & Thompson 1999:5,19). This can account for ‘business led’ liberalisation5 and deregulation6 (Castells 2000:60), which aimed to promote innovation and increase competitiveness in markets (Mansell & Steinmueller 2000:102). Regulatory change can be explained as rooted in a ‘force of ideas’. Baldwin and Cave refer to Self and assert that ideas, such as liberalisation, are ‘intellectual conceptions’ that underlie a social reality, which provides a basis for ‘political leaders [to] explain and justify their policies to the public’ (Baldwin & Cave 1999:26). Baldwin and Cave discuss the contention that deregulation during Reagan’s office, did not result from ‘interest group pressures’ but ‘economic rationalism’ (Baldwin & Cave 1999:26), underpinned by the ‘idea’ of liberalisation (Wikipedia 2005 b:1). However, simultaneously, advocacies of an ‘interest group’ theory might explain this regulatory change as a ‘competition for power’ seen to result from the interrelationships between groups, such as enterprises, and between these groups and government, in contradistinction to the ‘public-spiritedness’ of public interest theories (Baldwin & Cave 1999:21).

Castells asserts that to a considerable degree, economic restructuring is enabled by a convergence of telecommunications and computer technology. This is deployed to diffuse information, as part of capitalist endeavour to innovate, open new markets, integrate financial markets and segment production and trade on a ‘global’ scale (Castells 2000:60,96,502).

Whilst globalisation can be contextualised as convergence, where the distant increasingly shapes the local and vice versa (Steger 2003:10-11), this is enabled and mutually shaped by other forms of convergence. According to Garcia-Murillo and MacInnes, convergence is taking place in the realms of technology, industry, regulation and government agencies (Garcia-Murillo & MacInnes 2002:58). Mansell and Steinmueller consolidate this as a two-stranded issue, concerning the ‘technological potential of rendering all electronic communication signals as digital ‘bitstreams’ that can be interconnected’ and the ‘industrial and market implications of this technological potential’ (Mansell & Steinmueller 2000:98).

Technological convergence can be viewed at varying levels of abstraction, depending upon analytical purpose. Whilst Mansell and Steinmueller concentrate on an infrastructural dimension (Mansell & Steinmueller 2000:98), that is the ‘ability of different network platforms to carry essentially similar kinds of services’ (European Commission 1997:7), with a focus on distribution, Garnham includes in his analysis, content convergence of discrete, ‘pre-digital’ media forms into ‘new media’ forms, comprised of static and moving images, text and sound. He also evaluates technological convergence in terms of modes of consumption, that is, unidirectionality and multidirectionality (interactivity) (Garnham 1996:106-107). Another dimension of technological convergence is the ‘coming together of consumer devices such as the telephone, television and personal computer’ (European Commission 1997:7), which reflects the scope of competition between telecommunications, broadcasting and computing industries for current and emerging markets. However, the European Commission emphasises the prominence of networks, in that telecommunications operators are offering audiovisual content and Internet access, whilst broadcasters are providing ‘data services’ and simultaneously, cable operators are offering telecommunications services (ibid. 1997:7).

Accompanying these changes is market and industrial convergence, partly resulting from a diminution of entry barriers. This has blurred market and industry boundaries and created new market segments. Lind asserts that technologies and their corresponding markets are closely related, as they ‘mutually shape each other’ (Lind 2005:2). This can be illuminated by analysis of the nature of strategic alliances, mergers and acquisitions (Borés et al. 2003:2).

To an extent, these integrations can be explained theoretically by the ‘value-added chain’, which maps the ‘lifecycle’ of a commodity from production to consumption (Johnston & Lawrence 1991:195). Figure 1 illustrates a value-added chain of a new media product.

Figure 1: A value-added chain for a new media product

Figure 1: A value-added chain for a new media product (Adapted from European Commission 1997:7 Source: Squires Sanders Demspsey LLP and Analysys Ltd.).


‘Vertical integration’ describes the consolidation of a variety of enterprises in different parts of the chain, whose management is overseen by one company. This assists in coordination of activities, concretises purpose and enables realisation of economies of scale (Johnston & Lawrence 1991:199). ‘Horizontal integration’ refers to cooperation of firms existing in an individual part of the chain. According to the European Commission, generally, vertical integration is fostered to exploit ‘potential opportunities offered by market convergence’ (European Commission 1997:7). Value can be seen to have migrated from delivery, to content production and packaging, online transactions and services. This can be explained by liberalisation of markets, increased competition, together with digitalisation and increased network capacity of telecommunications and broadcasting networks. Thus companies have adapted by integration with more profitable parts of the chain and increased geographical reach in order to exploit new markets (ibid. 1997:16).

These ‘partnership’ strategies are competitive orchestrations designed to resolve ‘technological uncertainty’, ‘market uncertainty’ and ‘huge investments’ which necessitate mutual resources (Borés et al. 2003:2). Technological uncertainty relates to the risk involved in investment in a competing standard, risk in forecasting the potential size of a market and the nature of consumption, for example how technologies will be appropriated. During the ‘introductory phase’ of a product, there are many technological configurations that may emerge as the de facto standard and eventually, it is likely that only a handful of companies control the dominant product (Borés et al. 2003:2,7-8). Schumpeter might have described this process as the perennial ‘gusts’ of creative destruction. Borés et al. assert that an important dimension of market uncertainty is consumer reaction to an incremental or radical innovation. Research through ‘concept testing’ may not reveal ‘external’ factors such as ‘social influences’ that may affect uptake of an innovation and as such there is an inherent risk associated with ‘forecasting and projection […] to turn R&D programmes into profit’ (ibid. 2003:7-9). Mackay refers to Hall and asserts that technologies ‘facilitate, they do not determine’ and there is a ‘crucial role for the decoder of the text’ (Mackay 1995: 45). An example is the role of teenagers in the social construction of the mobile telephone, adapting it from a voice communication device to a ‘texting’ device. Another example is offered by Borés et al., who refer to the International Telecommunications Union and assert that Bell Atlantic’s projection of 1.2 million subscriptions for interactive television at the beginning of 1995 was somewhat misplaced, with a total of zero subscribers at year end. The huge investments required, even before profit is generated through a market, imply that ‘the danger of making the wrong bet is enormous’ (Borés et al. 2003:7-9).

Convergence has contributed to the formation of market structures that are characterised by an oligopolistic tendency (Melody 1996:308), with a few, large interdependent sellers, to the extent that there is reciprocal influence in the decisions of each enterprise (European Communities 2003:1). Mansell asserts that telecommunications markets are ‘characterized by global oligopolistic rivalry […,] far from a perfectly competitive market (Mansell 1996:376). Mody et al. agree and suggest an inclination towards ‘tight’ oligopoly, which they define as ‘four leading firms together controlling 60-100 per cent of the market’ (Mody et al. 2002:385). This situation is mirrored in media and entertainment content producers, such as AOL-Time Warner and Disney, predominantly US companies, that exhibit an oligopolistic ‘concentration of ownership’ (Shah 2004:2,8). Figure 2 illustrates a general trend from 1983 when fifty companies ‘dominated most of every mass medium’ to 1997 where this was reduced to ten ( Bagdikian cited in Shah 2004:2).

Figure 2: Number of market dominant mass media companies

(Adapted from: Bagdikian cited in Shah 2004:2)

Figure 2: Number of market dominant mass media companies

This trend illustrates that media firms ‘can no longer reach a mass audience with a single flagship programme or publication’ and so must utilise a multifaceted strategy based on a ‘portfolio of media properties, each targeted at a different group, across a range of platforms’ (Financial Times cited in Bradfield 2004:1). Developments such as these have played a significant role in accelerating the homogenisation of once diverse cultures (Hassan 2004:51-52), as localities become gradually detached from their cultural, geographical and historical meaning (Castells 2000:406), counterintuitively, resulting in ‘fragmentation’ (Hassan 2004:51-52). Castells refers to Ito who describes this as ‘segmented society’. As new media focus on multidirectional, specialised and diversified information, contrary to the ‘conventional’ mass media, culture becomes fragmented by ‘ideologies, values, tastes, and lifestyles’ (Castells 2000:368,405-406). The Internet epitomises a thematic customisation of products and services. For example, ecommerce is one arena that may affect online and offline market structures, as markets emerge for services such as electronic newspapers and online shopping. As well as enabling telecommunications and broadcasting sectors to elaborate their roles, convergence has also enabled IT industries to enter markets through the Internet, by providing database services for example, whilst publishing sectors have repurposed archived content (European Commission 1997:15).

Convergence and market restructuring have problematicised regulatory issues, partly as conventional regulation was based on technological differences between sectors (Garnham 1996:105). According to Garnham, the nature of communications sector development, in light of technological convergence, will to a degree be framed by ‘regulatory responses to strong opposing arguments’. Stakeholders with strong interests in industries such as broadcasting and telecommunications assert that conventional regulations are outdated and present developmental barriers to these industries. However, the counter argument is to protect the public interest by sustaining ‘existing regulatory defences’ and so maintain ‘universal service in telecommunications and public service in broadcasting’ (ibid.1996:112-113). The motivations of proponents of regulatory change can be understood as between an ‘interest group’ theory and a ‘private interest’ theory, the latter emphasising individual actors (Baldwin & Cave 1999:21-22).

The ‘regulatory policy dilemma’ is that the regulatory regimes associated with telecommunications, print and broadcast for example, are based on different philosophies with varying levels of intervention. Regulation of telecommunications has been founded on the basis of ‘natural monopoly in the provision of fixed networks’, with regulation of ‘access but not of content’ (Garnham 1996:112-113), subject to price and quality regulation as well as ‘universal service obligations’ (USO).7 Simultaneously, consumer electronics including computing products have been subject to limited intervention, generally left to market forces (Garcia-Murillo & MacInnes 2002:59). Broadcasting regulation has been based on spectrum scarcity and strong regulation of content, whilst print ‘remained largely unregulated’ (Garnham 1996:112-113). Garnham asserts that it is difficult to unite these disparate regulatory philosophies to oversee a ‘converged sector’. In the context of the communications sector, he proposes that regulation of networks requires a separation of carriage and content. Regulation of carriage would attempt to ensure efficiency through prevention of monopoly power and promote infrastructural development by exploiting economies of scale and scope (Garnham 1999:5). Content regulation emphasises protection of political and cultural issues. For example, information services that become widespread, can transform the ‘status of a private transaction’ into a ‘social fact’ in the public domain such that it ‘cannot be encompassed in a simple notion of freedom of speech or expression’, as other issues of public interest are raised. One sphere that may raise issues of moral values is exemplified by one-to-one ‘peer to peer’ file sharing. Also, content, as outlined earlier, may be controlled by a handful of oligarchs, such that plurality of media choice is restricted, to both producers and consumers (Garnham 1999:6). Garnham proposes here, that media regulation could centre on the volume of consumption, calculated for instance by newspaper sales or television viewing figures. Companies would be allocated a percentage of total ‘share of voice’ and so any one company would be restricted to limited control of the whole media market. One problem is defining ‘share of voice’ with enough accuracy for legal use (Garnham 1996:113). Garnham asserts that there is a ‘powerful case for the need to override the market’ in the regulation of the ‘information sphere’, as neglect can undermine ‘political and cultural democracy’. Presumably, even if a market is economically efficient, that says little about the nature of the information environment, as markets are indifferent to ‘altruistic concerns’ ( Baldwin & Cave 1999:15).

Garcia-Murillo and MacInnes refer to the European Commission and assert that another problem of convergence has been ‘regulatory vacuum’, where new services may not be covered by any regulatory body or a situation where regulation falls under the jurisdiction of two or more potentially conflicting bodies. Furthermore, the pace and uncertainty of technological change may limit the effectiveness of regulation in the near future and so regulators require flexible frameworks that can address this (Garcia-Murillo & MacInnes 2002:60-61).

In response to the problems of convergence and overlaps, in the UK , the Office of Telecommunications (OFTEL), recommended a ‘single electronic communications regulator’ to adequately control social and economic issues (Baldwin & Cave 1999:297). This materialised as OFCOM, which embraces and coordinates the previous roles of OFTEL, ‘The Independent Television Commission’ (ITC), ‘The Broadcasting Standards Commission’ (BSC), ‘The Radio Authority’ (RAu) and ‘The Radiocommunications Agency’ (RA) (Darlington 2004:1).

According to Freeman and Oldham , ‘markets function well only within a wider institutional regulatory framework’ (Freeman & Oldham 1991:4). In one sense, markets can be viewed hierarchically as a ‘sub-system’ of a political system that can harmonise conflicts that arise between ‘the rationality of individual economic decisions and goals that have been defined politically as being in the interest of society at large’ (Meyer 2004:73). In a global context, political systems and associated market elements can be seen to be partly coordinated by supranational bodies such as those of the European Union, which facilitate political and economic cooperation and assist in ‘the social and ecological reembedding of […] markets on a global scale’ (Meyer 2004:76).

‘Markets should be servants, not masters’ (Mody et al. 2002:388) and so should not dictate overarching ethical issues of ‘social responsibility’ (Baldwin & Cave 1999:14-15). Whilst markets are concerned with the efficiency of allocating resources in a society, they neglect the distribution of those resources and as such, inevitably promote inequality. ‘Distributive justice’ is a primary ‘non-economic’ reason to regulate (Ogus 2001:4). This concerns ‘fair’ allocation of resources and intrinsically involves value judgements, both in terms of distributive procedure and outcome. Often this involves the concepts of ‘equality’, equal distribution of resources, ‘equity’, distribution in proportion to contribution to production, and ‘need’, based on those who need more of a resource (Maiese 2003:1-3). The problem is that there is arguably, a trade off between efficiency and equity. Regulation to equitably redistribute income has the potential to reduce production, as for instance, wealthier actors would have less incentive to innovate. Thus, promoting equality or equity could lead to fewer resources for society as a whole (Schenk 2002:1).

In terms of telecommunications, a USO can be invoked on both grounds of market failure and equity (OFCOM No date available:6). Without regulation, in the UK, BT and Kingston’s pursuance of self-interest could lead to ‘cream-skimming’, the act of only supplying to ‘the most profitable customers’ (Baldwin & Cave 1999:13). BT suggests that USO costs between £50-70m per annum, subsidised by other network customers (OFCOM No date available:6). This is an important example of a perceived need to regulate in the ‘public interest’, so that individuals can move in line with the so-called ‘information society’.

Another non-economic reason to regulate is paternalism (Baldwin & Cave 1999:15). Government intervenes here, on the grounds that individuals may not necessarily make choices that benefit their welfare. Examples are laws that prohibit addictive drugs and the provision of ‘merit goods’, goods that society views as important, even if there is little demand. An example is an art gallery (Lipsey & Harbury 1988:271).

Planning is one of the most important non-economic reasons to regulate (Baldwin & Cave 1999:15-16). This concerns systematic organisation, which is ‘coordinated and future oriented’ towards goals that cannot be achieved by the market (Sartori 1991:155-156). One important aspect of this is ‘environmentally sustainable development’. In one context, this concerns an economic system that will fulfil present needs, whilst protecting resources for the future, without ‘irreversibly damaging the environment’. This can be achieved by reducing hazardous waste, controlling its disposal and protecting ‘non-renewable resources’ (Freeman & Soete 1997:414).

Market failure and social responsibilities are inseparable in terms of reasons to regulate. It is a question of balancing conflicting objectives. The market system can be seen as the ‘socially optimal’ method of allocating resources and regulation attempts to improve its failings. Regulation underpinned by the ‘subjective principles of social justice’ aims to provide ‘fair’ distribution of resources (Levačić 1991 b:45), participation in society and to offer protection to individuals and their environment and do the same for future generations. Allocative efficiency through self-interest conflicts with other social objectives, as, in their turn, these objectives undermine efforts of efficiency, as exemplified by USOs. Government intervention in markets is economically expensive (McConnell & Brue 2001:385-386) and does not guarantee any better results than a laissez-faire system would (Levačić 1991 b:45). However, non-intervention, in terms of ‘non-economic’ objectives, could be disastrous.

In conclusion, it can be seen that markets synchronise buyers and sellers through the mechanism of supply and demand. Markets attempt to allocate resources efficiently throughout society and fail when this allocation is inefficient and so governments may intervene with regulation, a set of rules to control behaviour in an attempt to achieve socioeconomic objectives. In the context of markets, regulatory objectives aim to increase efficiency by improving the behaviour of a market. Where a monopoly exists, competition laws can be enforced to promote competition or in a natural monopoly situation, regulation can be used control prices, output, quality and access. Externalities, such as pollution require regulating as the ‘true’ societal cost is external to the market price (Levačić 1991 b:36). A tradeable permit system can be used here to internalise the costs to the polluter (Baldwin & Cave 1999:11-12). Another form of externality is public goods, as exemplified by reception of public service broadcasting, where non-excludable consumption is hidden in the market price and therefore no incentive exists to produce these goods. Here, regulation can be in the form of a tax embodied in a license fee for example, whilst for ‘information inadequacies’ regulation can enforce information disclosure, so that consumers are better placed to assess competing products (ibid. 1999:12,14).

Market failure can also be viewed as part of widespread economic volatility, as experienced during the 1970s and 80s, which prompted ‘business led’ liberalisation and deregulation of markets (Castells 2000:60). Arguably, although not necessarily, this regulatory reform can be framed as a ‘force of ideas’. Part of this restructuring was increased and accelerated globalisation, as capitalist endeavour developed and harnessed a convergence of computing and telecommunications technologies in order to promote economic growth.

Technological convergence encompasses interconnection and interoperability of differing delivery networks, towards an ‘integrated broadband communication’ network (Mansell & Steinmueller 2000:102), as well as a confluence of discrete ‘old’ media into ‘new’ media and the coming together of formerly distinct consumer electronic products.

Capitalist endeavour coupled with an inceptive channeling of contemporary technological convergence has significantly displaced the boundaries of markets, which have become characterised by convergence, emergence and divergence. Industries and sectors are converging, as illustrated by corporate integration across vertical and horizontal axes, in an attempt to address ‘technological uncertainty’, ‘market uncertainty’ and ‘huge investments’ (Borés et al. 2003:2). Generally, this has resulted in oligopolistic market structures. These developments are reflected in the demand side of the market, where new media, for example, has led to homogenised and fragmented culture, characterised by customised demand, that is, a divergence of products and services that has led to new and emerging markets. Each sphere of convergence appears to reciprocally shape the others and all of this is played out in a global context.

Garnham proposes that a response to convergence is to regulate carriage and content separately, with objectives of promoting efficiency in the former and protection of culture and democracy in the latter. Oligarchs could be restricted in their share of media markets by limiting consumption of their products, so as to promote pluralism for example. In order to address these issues, in the UK, communications related regulatory bodies have resolved to one regulator, OFCOM, partly in an attempt to prevent ‘regulatory vacuum’ and overlapping ambits (Garcia-Murillo & MacInnes 2002:60-61).

Free market economies in contrast to centrally planned ones appear to offer greater efficiency in allocating resources and it seems that there is no better system (Lipsey & Chrystal 1995:418). Government intervention aims to optimise efficiency, although this may not improve matters. Be that as it may, markets disregard social responsibilities. The social policy objectives here are to promote ‘fair’ distribution of resources, allow active participation in society, protect individuals from themselves and others and sustain a habitable environment for future generations.

Future generations secured, it is important to address the inequalities that stem from an imbalance of efficiency and ‘fairness’. Dan Schiller asserts that

digital capitalism has strengthened, rather than banished, the age-old scourges of the market system: inequality and domination. The road to redress begins from this recognition (Schiller 1999:209).


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1 Market structure refers to the attributes that may impact the performance and behaviour of firms in a market, such as the number of competitors and the types of products sold (Lipsey & Chrystal 1995:216).

2 The perfect competition approach is associated with neo-classical economics. Another, quite different conception of the market can be seen in the neo-Austrian approach, à la Schumpeter (Frances et al. 1991:6). He rejects the idea of perfect competition being a ‘model of ideal efficiency’ and asserts that ‘it is not only impossible, but inferior’ (Schumpeter cited in Kamien & Schwartz 1982:9). For Schumpeter, this tendency to equilibrium through price is mythical. He posited that the economy tended towards ‘disequilibrium’, underpinned by competition, not from price, but from ‘the new commodity, the new source of supply [and] the new type of organization’, part of a process he described as ‘creative destruction’. Central to Schumpeter’s work is the idea that ‘in the conflict between entrepreneurial activity and perfect competition, the latter should be sacrificed’(Kamien & Schwartz 1982:8-9).

3 An incumbent is a firm that holds key assets and control in an industry. Microsoft exemplifies this in the operating system market and would employ an incumbent strategy to retain ‘control of their dominant position’ by meeting competitive threats with ‘creative strategies’ such as ‘reconfiguration of assets that in the past have proved to be stable sources of competitive advantage’ (Mansell & Steinmueller 2000:24-26). An insurgent strategy aspires to compete with incumbents, often through introducing innovation, in such a way as to threaten incumbent positions or develop new markets, ‘with the aim of mass-market acceptance’ (ibid. 2000:29,32).

4 Economies of scale can be achieved as an enterprise increases its production, leading to a situation where ‘output increases more than in proportion to inputs’. Economies of scope can be achieved when an enterprise is ‘large enough to engage efficiently in multi-product production and associated large-scale distribution’ (Lipsey & Chrystal 1995:880,885).

5 Liberalisation is concerned with policies that restrict government intervention in markets, except where it serves market efficiency. Such policies include privatisation and deregulation (Economist 2005 a:1).

6 Deregulation is a ‘loosening’ or reconstitution of regulation, by decreasing government intervention, to promote competition and hence increase market efficiency. This is often coupled with privatisation of state owned industries (Economist 2005 b:1).

7 Universal service concerns ‘access to a defined minimum service of specified quality to all users everywhere, and in the light of specific national conditions, at an affordable price’ (European Commission cited in Hawkins et al. 2002:245-246). In the context of the UK, a USO means that BT and Kingston are charged with funding and ensuring provision of affordable basic telephony services, including Internet access, although not broadband, to all UK ‘citizen-customers’. A USO attempts to ensure that these services are available to those who cannot afford them or who may live in an area that is uneconomic to serve (OFCOM No date available:3,5-6).