Pricing Access to a Monopoly Input

What price should downstream entrants pay a vertically integrated incumbent monopoly for use of its assets? Courts, legislators, and regulators have at times mandated that incumbent monopolies lease assets required for the production of a retail service to entrants in efforts to increase the competitiveness of retail markets. This paper compares two rules for pricing such monopoly inputs: marginal cost pricing (MCP) and generalized efficient component pricing rule (GECPR). The GECPR is not a fixed price, but is a rule that determines the input price to be paid by the entrant from the entrant's retail price. Comparing the retail market equilibrium under MCP and GECPR, the GECPR leads to lower equilibrium retail prices. If the incumbent is less efficient than the entrant, the GECPR also leads to lower production costs than does the MCP rule. If the incumbent is more efficient than the entrant, however, conditions may exist in which MCP leads to lower production costs than does the GECPR. The analysis is carried out assuming either Bertrand competition, quantity competition, or monopolistic competition between the incumbent and entrant in the downstream market.     

Downstream gas pricing in an era of upstream deregulation

State public service commission regulation of gas utility pricing is examined during the period of wellhead price deregulation. A model which incorporates asymmetry in price setting during a period of changing input costs is estimated. Statistical analyses suggest public service commission regulation slowed the increase in gas utility prices during periods of rising costs. Gas utility pricing was not monitored as closely when purchased gas prices fell, thereby altering the rate structure in favor of industrial customers. Federal Energy Regulatory Commission policies designed to promote competition by restructuring the transmission sector of the gas industry after 1985 appear to have suppressed retail prices in industrial markets.     

Commitment in regulation: Defense contracting and extensions to price caps

Department of Defense regulation of weapons contracting uses incentive devices common to public utility regulation. This paper examines parallels between fixed-price contracts in weapons acquisition and the use of price caps to motivate public utilities. It uses defense contracting experience to identify limits to the efficiency and administrability benefits one can expect adoption of a price caps regime to produce in practice.     

Asymmetric access price regulation in telecommunications markets

In liberalized telecommunications markets, the incumbent typically enjoys several advantages over any entrant. Regulation in such asymmetric markets stimulates competition in the short and the long term if retail prices are low and the entrant's profits are high so that entry is encouraged. I show that asymmetric access price regulation with a cost-based access price for the incumbent and an access markup for the entrant is more successful than cost-based access price regulation applied to incumbent and entrant. This is a robust prediction with respect to the pricing strategies considered. Such asymmetric access price regulation is in accordance with European legislation.     

Optimal privatization of vertical public utilities

Abstract We examine restructuring, divestiture, and deregulation of a vertically integrated public utility, (e.g., electricity), from a public finance perspective. How an optimal restructuring plan for the utility depends on the cost of public funds and on the X‐efficiency gains from privatization, how the optimal degree of competition in the upstream and downstream segments are connected, and implications of privatization for consumer prices are examined. The higher the cost of public funds, the more likely the post‐privatization price will exceed the regulated public utility price. The greater the X‐efficiency gains from privatization, the more likely the post‐privatization price will fall.     

The costs of uncoordinated regulation

Patents encourage firms to undertake research and development by protecting innovator revenues from competition. Controls on pollution of the environment are intended to close the gap between the private and social costs of natural resource use. This paper examines the incentives that are created by the interaction of these two separate pieces of regulation. A model is developed that shows how an incumbent, patent-holding firm can take advantage of environmental regulation to exclude rivals from her market.     

Technical efficiency,allocative efficiency,and the impact of incentive regulation in telecommunications in the United States

Incentive regulation is now an important regulatory tool in the telecommunications industry in the United States. The objective of incentive regulation is to improve productive efficiency, enhance service quality and consumer welfare, and reduce the costs of regulation. The issue that is considered here is whether incentive regulation in the form of a price cap applicable to interstate access service to local loops has resulted in an increase in the technical efficiency and allocative efficiency of local exchange carriers (LECs). After discussing the reasons for adopting incentive regulation, the nature of price caps is explored followed by an overview of the methodology for measuring the effects of incentive regulation on productive efficiency. The results indicate that for changes in technical efficiency, there is a definite randomness between 1985 and 1993 with technical efficiency increasing in some years and decreasing in others. Subsequent to 1993, however, there is a consistent improvement in technical efficiency. Given that incentive regulation in the forin of price caps was implemented for LECs in 1991, it is likely that some portion of the improvement in technical efficiency subsequent to 1993 is attributable to incentive regulation. A pronounced upward trend in allocative efficiency is observed beginning in 1985. It is problematic, however, to attribute the improvement in allocative efficiency to the adoption of incentive regulation. It is more likely an artifact of the divestiture of AT&T although some indeterminant portion is probably associated with the implementation of price caps.JEL classification: L51, L96     

Price cap regulation of a dominant firm facing competition

Price cap regulation is typically applied to natural monopolies operating with subadditive costs. Price caps are known to provide superior incentives for the regulated monopoly to pursue cost reduction and, in a multiservice/product context, undertake welfare enhancing price discrimination. It is well known that capping a Laspeyres index of the firm’s prices induces the monopoly to charge socially optimal “Ramsey” prices in the long run. This paper examines the suitability of the Laspeyres form of regulation when the regulated firm faces competition in the market for one of its services (outputs). We present the appropriately modified Ramsey pricing rule for the regulated dominant firm and demonstrate that capping a Laspeyres index of the dominant firm’s prices leads to prices that satisfy this pricing rule in the long run.     

Regulatory reform in telecommunications in Central and Eastern Europe

In this paper we discuss public policy towards the telecommunications sector in Central and Eastern Europe (CEE), focusing primarily on the need to ensure adequate capital investment. The analysis falls into two main parts: the regulation of monopoly, and policy on liberalization. Concerning regulation, we discuss how policy credibility is likely to be a problem in the region, and how reputational considerations, the design of regulatory institutions, and methods of price control can help to ameliorate this problem. Concerning liberalization, we consider the effects of potential competition on investment incentives, and construct a simple model to analyse the different effects of liberalization and regulatory risk on investment. Some preliminary policy conclusions are drawn, and we argue that in the CEE region – in contrast to more well developed countries – a reasonable case can be made for allowing a temporary period of monopoly for basic services.     

Regulation and Access Pricing: Comparison of Regulated Regimes

The statutory duties of regulators of British utilities include both the encouragement of competition and protection of consumers (through price caps). Competition depends on the terms on which new entrants can gain access to the monopolist's network. Where the incumbent in the retail market also owns the network, the regulator may determine prices in the capped and access markets separately or may make the price cap explicitly dependent on entry in the uncapped market. Contrary to the received wisdom that access charges should be separately regulated we show that higher welfare can be obtained in some circumstances by allowing the incumbent to determine access charges. This is achieved by permitting the incumbent to choose from a menu of retail prices which the regulator makes conditional on the extent of entry in the retail market.     

QUALITY-CORRECTED PRICE CAPS

Although price caps have desirable efficiency properties, it is well known that they may create incentives for a regulated firm to attempt to lower its costs via reductions in service quality. Thus, the regulators often employ quality standards or other methods designed to have allowed prices reflect delivered service quality levels. In this paper, we present a system of quality‐corrected price caps that results in efficient pricing and quality provision.     

Economic determinants of deregulation in the gas distribution market

Many state public commissions have deregulated their utility markets. However, evidence of welfare or efficiency improvements under deregulation is ambiguous. It is also unclear why different states adopt consumer choice, price caps, sliding-scale plans, or retain rate-of-return regulation. This study evaluates several economic factors behind deregulation in gas distribution markets using a survey of state commissions. Logistic and hazard models show that utilities’ prices and capacity, and states’ stock of own gas wells, prices of competing fuels and the regulatory climate, help explain the pattern of deregulation. Demonstration effects from surrounding markets also contribute. These factors make the propensity to use price caps versus restructuring vary regionally.     

Progressive entry and the incentives to invest in alternative infrastructures

In this paper we study an entrant’s incentives to build a network infrastructure, when there is an initial phase of service-based competition where it leases access to the incumbent’s infrastructure. We build a model in which the phase of service-based competition allows the entrant to step into the market by progressively acquiring market experience. We show that the acquisition of experience in the phase of service-based competition delays the entrant’s investment when the prospects for infrastructure investment are good, and accelerates investment otherwise. We also show that when the acquisition of experience depends on the entrant’s current customer base and facility-based entry is a long-term possibility, setting a low access price can accelerate the entrant’s investment.     

Wholesale Spot Price Pass-Through

It has been proposed that, when electricity markets open to retail competition, incumbent distribution utilities should be required to sell to residential customers at wholesale spot market prices. It is argued here that this overestimates the value of spot-price sales to customers, and underestimates the costs and disadvantages of the proposed policy. Experience in San Diego illustrates the problems. But other policies such as shopping credits have deficiencies too. An alternative approach, based on transitional maximum price caps, has facilitated the development of a competitive and fully deregulated residential retail market in the United Kingdom.     

Price Caps and Output Floors: A Comparison of Simple Regulatory Rules

We study in this paper a simple alternative to price cap regulation. The mechanism, which we label 'output floor' regulation, requires the regulated firm to supply a given level of output. This rule is as simple as price cap regulation, and performs identically when the regulated firm is a natural monopoly; however, we show that, in the presence of a competitive fringe, output floor regulation yields lower prices and stronger incentives for cost reduction. Its introduction, however, is likely to be resisted by the industry, since it lowers managerial utility and shareholders' profits.     

MANAGING SWITCHING COSTS IN MULTIPERIOD PROCUREMENTS WITH STRATEGIC BUYERS*

This article examines the use of switching costs by long‐lived strategic buyers to manage dynamic competition between rival suppliers. The analysis reveals how buyers may employ switching costs to their advantage. We show that when switching costs are high, a buyer may induce suppliers to price more competitively by credibly threatening to replace the incumbent supplier with his rivals. The implications of this finding for adoption of technology and firm organization are explored in settings in which the buyer is integrated with the suppliers and where the buyer is an outsourcer.     

产品差异、转移成本和市场竞争

文章通过在豪泰林空间差异模型的基础上结合转移成本构建的博弈模型,主要研究转移成本和产品差异的存在对于企业价格竞争和策略性行为的影响。文章发现纯策略价格均衡是否存在以及在位企业容纳还是遏制竞争对手的潜在进入,都依赖于转移成本相对于产品差异程度的大小。     

The strategic value of partial vertical integration

We investigate the strategic incentives for partial vertical integration, namely, partial ownership agreements between manufacturers and retailers, when retailers privately know their costs and engage in price competition with differentiated goods. The partial misalignment between the profit objectives within a partially integrated manufacturer–retailer hierarchy implies a higher retail price than under full integration. This ‘information vertical effect’ translates into a ‘competition horizontal effect’: the partially integrated hierarchy's commitment to a higher price induces the competitor to increase its price, which strategically relaxes competition. Our analysis provides implications for vertical merger policy and theoretical support for the recently documented empirical evidence on partial vertical acquisitions.     

Fiber deployment in Spain

Next generation access networks will be critical for future economic growth and access to these infrastructures will have major consequences for territorial and social cohesion. This paper examines the economic and competition determinants that serve as incentives for operators to invest in fiber-to-the-home technology. We draw on a dataset comprising 6603 Spanish municipalities with access to broadband services to examine the incumbent’s (Telefónica) deployment of fiber in the period 2010–2013. We show that local loop unbundling competition had a strong positive impact on Telefónica’s fiber deployment, while bitstream competition had a negative effect. Moreover, the incumbent was more likely to invest in municipalities with a large presence of cable operators. We also consider how the municipalities’ sociodemographic characteristics affected the operator’s deployment decision. While market size and population density had a positive effect on investment, the level of unemployment and the percentage of elderly population had a negative impact.