market must be reconsidered. If MPT does not change its projectionist approach to long distance NCCs, there may arise at least 2 problems. NCCs may misunderstand their position as permanent and seek to settle there by subtle coordination among themselves and NTT. With the advent of new technology long distance carriers will have to enter into local market but they may not be able to do so simply because they are classified as long distance carrier. This kind of problem can be solved by removing entry and exit regulation and letting the number of firms unregulated.

### I V. Competition in the local market

It was generally believed that local telephone market is natural monopoly but Japanese Telecom Business Law allowed new competition in the local market at its outset. Accordingly new entry was attempted by electric utility companies creating a subsidiary company in each franchised region. In this sense Japanese institutional framework seems progressive but in reality competition has not advanced as expected. There are several reasons: Local competitors have been handicapped severely because interconnection with NTT local network is asymmetrical. Subscribers of electricity company telephone network can telephone to other subscribers but NTT customers cannot reach those subscribers. Rate rebalancing was not realized because local rate was kept unchanged as the days of public monopoly (See Figure-5). This has made local bypass extremely difficult compared with U.K. or U.S..

The local telephone market experienced a dramatic change in the late '80s in the U.S. and U.K. It was not based upon institutional niches which allowed cream skimming but upon bypass technology which was developed by firms that endeavored to reduce payment to the local telephone companies. Rate rebalancing and/or imposition of access charge were the most important stimulus to bypass local network, namely encouraging competition in the local market. The typical bypass technologies like mobile telephone and CATV are notable from the viewpoint of industrial organization of local telephone service. These technologies have begun to provide the possibility of local bypass by challenging natural monopoly based upon old technology. They can realize economies of scale without requiring huge amount of customers. That is, the critical mass necessary to compete with a local telephone company is very small.

Japan has been in a strange situation in the context of development of local competition. First, the competition between cellular and local telephone has not been well developed simply because mobile telephone service have been too expensive. Competition was limited among cellular companies and those companies were not direct competitors to NTT network. Other wireless radio companies have not appeared until recently. This phenomenon is basically dependent upon MPT regulation policy. Mobile telephone or other wireless radio services are defined Type I carrier by the Telecom Business Law. MPT must regulate those carriers with regard to tariff, entry and exit. Tariff must be based upon accounting cost which cannot be low without realizing critical mass. Strategic pricing to combat telephone local network was not permitted because financial stability was respected to avoid discontinuity of service.