competition with NCCs.

### I II. Competition in the long distance market

In the long distance market, DDI (Daini Denden Incorporated), JT (Japan Telecom) and TWJ (Tele Way Japan) entered and began telephony service in 1987. They could successfully compete with NTT because the quality of service was identified equal with NTT and there existed price differential between NTT and NCCs. Table-4 and Table-5 show that the rate of NCC was about 15 to 20% lower than that of NTT. If NTT could make price matching to NCCs with delay as was the case between AT&T and OCCs, the advantage of NCCs may have been vulnerable. But NTT was not allowed to do so and price differential accounted for the success of NCCs. In face of this outcome we must ask the question whether NCCs success can be justifiable from the view point of efficiency as well as income distribution aspect.

Under the Telecom Business Law the number of competitors in a market should be regulated by MPT in the name of supply and demand balancing clause. Because there existed no rate rebalancing or access charge as in the U.S. or U.K. sense (Figure 5), we encountered the problem of cream skimming by new comers. At least two of three NCCs made a huge profit in the past several years. When we look at the Table-3 DDI and JT enjoyed high rate of return on equity or total capital until 1993. In 1994 it declined because of the introduction and access charge and price reduction. TWJ continued to lose during this period but this comes from the failure of management of their investment policy. Is it equitable for them to be entitled to earn extra profit? How can we justify such supra normal privilege of NCCs? If the number of entrants was not restricted by MPT, more firms will enter to exploit “cream” and extra profit would have disappeared. This is the income distribution problem whether it is fair for the limited number of entrants to be given opportunity to earn excess profit. Another problem is deeply concerned with dynamic efficiency. Nobody can know whether new comers once selected by MPT are efficient challengers to NTT. As in the U.S. where the number of competitors in the long distance market is not regulated by FCC, we can depend upon the usual entry and exit mechanism to find out efficient firms ultimately. Japanese style of regulation cannot guarantee the efficiency of new competition.

The advantageous status of NCCs can be justified in theory as a kind of infant industry protection. But as is clearly discussed in the economics textbooks, the government cannot protect new comers forever. There must always exist some time limit when protection comes to an end. MPT has never made clear when protectionism will be replaced by the free entry of other firms. This might have given wrong signals to the existing three firms. In view of the telecommunications industry in the future, it is almost certain that the distinction between long distance and local market becomes obscure. In the U.S. judicial demarcation between long distance and local market is going to be abolished and mutual entry between long distance carriers and RBOC's will be realized in the near future. The concept that long distance market is competitive and local market is natural monopoly is completely out of date. In sight of this change the regulatory device of long distance