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Interconnection and incentive regulation in network industries

Author

Listed:
  • Iván Major

    (Hungarian Academy of Sciences Institute of Economics, Research Centre for Economic and Regional Studies, Budaörsi út 45., Budapest H-1112, Hungary)

  • Károly M. Kiss

    (Department of Economics at University of Pannonia, Veszprém, Hungary)

Abstract

The price regulation of network industries has changed tremendously all over the world recently. Theoretical contributions specifically advocate and telecommunications, energy and other market regulators in various parts of the world practice cost-based pricing for inter-firm network access services. Cost-based pricing is performed under the assumption that the regulator has perfect information regarding the costs of producing the services. We show that — under fairly general conditions — cost-based pricing creates incentives for regulated firms not to improve their efficiency. Allowing for information asymmetry between the regulator and the regulated firms, we find that incentive regulation will eliminate the adverse effect of cost-based pricing on the firms’ efficiency and on social welfare.

Suggested Citation

  • Iván Major & Károly M. Kiss, 2013. "Interconnection and incentive regulation in network industries," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 63(1), pages 1-21, March.
    • Handle: RePEc:aka:aoecon:v:63:y:2013:i:1:p:1-21
    Note: Research to this paper was supported by the Hungarian National Science Fund (OTKA, grant no. 81235). We are grateful for the valuable comments of two referees. Needless to say, all the remaining errors are ours.
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    Citations

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    Cited by:

    1. Iván Major, 2019. "Two-Sided Information Asymmetry in the Healthcare Industry," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 25(2), pages 177-193, May.

    More about this item

    Keywords

    network industries; regulation; incentive contracts;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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