Carriers deliver mobile phone service by subdividing large geographic areas into smaller overlapping sections called cells. Each cell has a base station equipped with an antenna to receive and transmit radio signals to the mobile phones within its coverage area. This area can vary in size from under a mile to 20 miles from the base station. Mobile phones are low- powered radio transceivers (a combination radio transmitter and receiver) that use radio waves to communicate with the base stations. A mobile phone’s communications are generally associated with the base station of the cell in which it is presently located. When a call is initiated, the base station assigns a radiofrequency to the mobile phone from among the group of frequencies that the station controls. The number of frequencies available at a base station will depend primarily on the amount of radiofrequency spectrum assigned to the carrier by FCC, the number of base stations in the carrier’s service area, and the carrier’s signaling standard.Each base station is linked to a mobile phone switching office, which is also connected to the local wireline telephone network. The mobile phone switching office directs calls to the desired locations, whether to another mobile phone or a traditional wireline telephone. This office is also responsible for handing off calls from one cell to another in a smooth and seamless manner as a customer changes locations during a call. Figure 1 provides a simplified picture of the key components of a mobile phone system. FCC is the federal agency that oversees interstate telecommunications in the United States, including mobile phone service. The mobile phone industry began to develop in the mid-1980s when FCC awarded radiofrequencies to two cellular carriers in each geographic market. FCC awarded one cellular license to the incumbent wireline telephone company and a second license to an independent carrier. If there was only one applicant for the second license, that applicant received the license. When more than one applicant applied, FCC used comparative hearings, which give competing applicants a quasi-judicial forum in which to argue why they should be awarded a license instead of other applicants. Later, at the direction of the Congress, FCC held lotteries to award licenses. In establishing the rules under which the cellular phone industry would operate, FCC made several key decisions: All carriers would use the same analog technology to provide service. Within 3 years of receiving a construction permit, carriers would have to build networks that could theoretically serve the areas for which they obtained a license. At the end of the 3 years, licenses for those areas that could not theoretically be served might be made available to some other carrier. Carriers would have to inform customers of the area in which reliable service could be expected. No other call quality standards would be required. That is, no minimum requirements concerning the probability that calls would be completed with good sound quality were established. FCC considered establishing such standards, but decided to let the marketplace determine the level of call quality. Carriers would have to notify FCC if they turned away a customer because of a lack of capacity and state how they intended to remedy this lack of capacity. Since it was first launched, the industry has migrated from using only analog technologies to primarily using digital technologies. Originally carriers used an analog technology that is similar to that used for the transmission of FM radio broadcasts. While analog technologies are still being used, most service is now provided with digital technologies, which have several advantages over analog technologies: they provide for better security, allow for services such as caller identification, allow noise to be reduced on calls, and conserve on the use of scarce spectrum resources.FCC did not specify a single digital technology. Instead, carriers were free to adopt one of several signaling standards: code division multiple access (CDMA), time division multiple access (TDMA), and global system for mobile communications (GSM). In addition, Nextel Communications uses a technology called integrated Digital Enhanced Network, a derivative of TDMA. The industry has grown dramatically over time. In terms of annual revenues, the industry has mushroomed: from about $482 million in 1985 to over $27 billion in 1997 and then to over $76 billion in 2002. In recent years, from 1997 through 2002, average monthly minutes of use of mobile phone use grew almost 900 percent, from about 5.6 billion minutes per month in 1997 to about 55.5 billion in 2002 (see fig. 2). This growth resulted not only from an increase in subscribership but also from a marked increase in the average number of minutes used by each subscriber. To subscribe to mobile phone service, a customer must sign-up with a mobile phone service carrier, either by signing a contract and choosing a plan, or by purchasing prepaid minutes of airtime and buying a phone that works with the prepaid service. Most customers sign contracts that specify a geographically based rate plan and the size of the block of minutes the customer is buying for a flat monthly fee. New customers sometimes pay up-front fees for “network activation” of their phones and usually agree to pay an “early termination fee” if they should quit a carrier’s network before the date specified on the contract. In return for signing the contract, customers often receive mobile phones, suitable for their carrier’s network, at a price lower than that which they would have to pay without a service contract. Because of the nature of radio transmission, the amount of radiofrequency spectrum allocated by FCC for mobile phone service, and the challenge of building the infrastructure to meet a rapidly growing consumer base, consumers are not always able to complete their phone calls or to hear them clearly. The following, some of which are illustrated in figure 3, are examples of such call quality concerns. Consumers may not be able to complete calls because the radiofrequencies used for mobile phone service can be blocked by terrain, such as hills, or by man-made structures. The structural features of some buildings can block signals from reaching the interior of the buildings. Similarly, signals may not be able to penetrate into subways or tunnels. Consumers’ calls may be disrupted by temporary conditions, such as weather or interference from other wireless devices. A consumer may be unable to initiate a call because the local base station’s available radiofrequencies are all in use by other consumers. The consumer may receive a fast busy signal instead of a dial tone or some other indication that frequencies are not available. Consumers’ calls may be dropped when moving from a cell that has capacity to an adjacent cell that cannot handle additional calls because it is already at capacity. A consumer’s call may not be connected because of a “dead spot” within a carrier’s service area where there is no base station coverage. This may be due to decisions made by carriers concerning the building of base stations, or difficulties in finding a suitable location or obtaining zoning approval to construct additional base stations. Consumers may be unable to initiate calls because their service carrier does not cover the area from which the call is being made and the carrier does not have an agreement with a competitor to serve its subscribers under a “roaming” agreement. Beginning in 1993, the Congress enacted legislation aimed at developing a regulatory framework that would treat commercial carriers in a consistent manner and encourage the growth of competitive markets for mobile phone services. FCC has acted to implement this regulatory framework and is relying on consumer choice in a competitive marketplace to determine the level of call quality, rather than setting a minimum standard for the industry to meet. At the direction of the Congress, FCC analyzes and reports on competitive market conditions in the mobile phone industry annually. To date, these reports have included issues such as the number of carriers, prices, and subscribership but not call quality. In the early 1990s, types of mobile phone services other than cellular had been or were about to be developed. These new services were demonstrating that greater competition could exist in this marketplace; however, two different regulatory regimes had developed: one for the original cellular service and another for newer mobile phone services that used other technologies or portions of the radiofrequency spectrum. In 1993, the Congress enacted legislation—the Omnibus Budget Reconciliation Act (1993 Act)—that promoted consistent regulation of commercial mobile phone service carriers and established the promotion of competition as a fundamental goal for the development of mobile phone policies and regulation. The 1993 Act included several provisions to achieve these goals: All commercial mobile phone services were to be regulated similarly, without regard to the specific technology or radiofrequency spectrum used by a carrier. FCC was to auction spectrum licenses when more than one user wanted to use certain frequencies for the transmission of mobile phone calls. This method of assigning licenses requires mobile phone service carriers to pay for the right to use the spectrum and awards the spectrum to the carrier willing to pay the highest price for it under certain conditions. Numerous licenses were to be auctioned in each mobile phone market so that a wide variety of bidders could participate. FCC was given the authority to refrain from applying certain provisions of the Communications Act of 1934 that FCC found to be unnecessary under specific statutory criteria. For example, FCC did not apply provisions that restricted market entry or exit. FCC was required to report annually on competitive market conditions in the industry. The report was to include an identification of the number of competitors in various commercial mobile services, an analysis of whether or not there is effective competition, an analysis of whether any competitors have a dominant share of the market, and a statement of whether additional providers or classes of providers would be likely to enhance competition. In addition, the 1993 Act preempted states and local governments from regulating the entry of or the rate charged by any mobile service carrier. However, states could petition FCC for authority to regulate commercial rates under certain conditions. Shortly after the 1993 Act was enacted, eight statessought the right to continue regulating wireless rates. FCC denied all of the petitions.