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Splitting the Baby: An Empirical Test of Rules of Thumb in Regulatory Price Setting

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  • T. Randolph Beard
  • George S. Ford

Abstract

This article provides an empirical evaluation of a recent and important exercise in regulatory price setting in the United States. The 1996 Telecommunications Act required incumbent local phone companies to sell components of their network to rival firms at regulated prices, and the prices for these ‘unbundled network elements’ were based primarily on independent estimates of forward‐looking economic costs. Our econometric analysis reveals that, while cost is a primary determinant of element prices, the prices also reflect foregone retail profits for incumbent firms. Statistical tests suggest that ‘splitting the baby’ is an accurate positivist description of public agency behavior.

Suggested Citation

  • T. Randolph Beard & George S. Ford, 2005. "Splitting the Baby: An Empirical Test of Rules of Thumb in Regulatory Price Setting," Kyklos, Wiley Blackwell, vol. 58(3), pages 331-351, July.
    • Handle: RePEc:bla:kyklos:v:58:y:2005:i:3:p:331-351
    DOI: 10.1111/j.0023-5962.2005.00291.x
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    References listed on IDEAS

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    2. Palmer, Karen & Ando, Amy, 1998. "Getting on the Map: The Political Economy of State-Level Electricity Restructuring," RFF Working Paper Series dp-98-19-rev, Resources for the Future.
    3. Brown,Stephen J. & Sibley,David Sumner, 1986. "The Theory of Public Utility Pricing," Cambridge Books, Cambridge University Press, number 9780521314008.
    4. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
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