This chapter presents a brief overview of the production of telecommunications services. Our purpose is to provide enough information to identify the most distinguishing economic features of this industry, yet to avoid the weight of excessive detail. We first examine the technology used in the telecommunications sector, emphasizing its most important economic characteristics and contrasting them with the salient features of other public utility services. Next, we summarize the institutional and regulatory arrangements that currently govern telecommunications in the United States. Finally, we briefly indicate the major types of tariffs that are found in American practice, many of which we examine in detail in later chapters. Readers who are already familiar with these topics may wish to turn directly to Chapter.

Stylized telecommunications technology

We may consider telecommunications to be the two-way exchange of information in the form of voice or data messages between two users at distinct geographic locations. Frequently it is useful to think of the users as terminal nodes in a network and the fundamental telecommunications service as simple telephone “calls” between nodes. One method of supplying telecommunications is to provide a direct, dedicated link between each pair of nodes. With this technology the marginal cost of a link increases directly with the size of the network, and for more than a very small number of nodes it becomes necessary to find ways to economize on links.

Switching networks perform this function. To take advantage of economies of scale, switching points concentrate calls that are destined for the same end node and bundle them together for bulk transport over a limited number of high-capacity links.