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Dynamic Pricing and Investment from Static Proxy Models

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Author Info

  • Mandy David M.

    ()
    (University of Missouri)

  • Sharkey William W.

    (Federal Communications Commission, Washington, D.C.)

Abstract

This paper evaluates the use of static cost proxy models in setting forward-looking prices such as the prices set according to the FCC's TELRIC methodology. First, it compares the time paths of prices and depreciation under traditional regulatory accounting with the prices and depreciation implied by various versions of TELRIC. When TELRIC prices are recomputed at intervals shorter than asset lives, the firm will generally not earn the target rate of return. In these cases, a correction factor must be applied to the TELRIC price path in order for revenues to exactly recover investment cost, including the target rate of return. Next, the paper considers a firm's cost minimizing investment decisions under two different assumptions about asset obsolescence. In both scenarios, cost minimizing investment paths and implied utilization rates for the firm's assets are derived under a variety of assumptions about the relevant input parameters. Some implications for TELRIC pricing are then derived.

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File URL: http://www.degruyter.com/view/j/rne.2003.2.4/rne.2003.2.4.1036/rne.2003.2.4.1036.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal Review of Network Economics.

Volume (Year): 2 (2003)
Issue (Month): 4 (December)
Pages: 1-37

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Handle: RePEc:bpj:rneart:v:2:y:2003:i:4:n:7

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Cited by:
  1. Bauer, Johannes M., 2005. "Unbundling Policy in the United States Players, Outcomes and Effects," MPRA Paper 2455, University Library of Munich, Germany.
  2. Ulrich Blum & Christian Growitsch & Niels Krap, 2006. "Network Investment and the Threat of Regulation – Preventing Monopoly Exploitation or Infrastructure Construction?," IWH Discussion Papers 7, Halle Institute for Economic Research.
  3. Kenneth Fjell & Øystein Foros & Debashis Pal, 2006. "Endogenous Average Cost Based Access Pricing," University of Cincinnati, Economics Working Papers Series 2006-01, University of Cincinnati, Department of Economics.
  4. Sappington, David E.M., 2006. "On the design of input prices: Can TELRIC prices ever be optimal?," Information Economics and Policy, Elsevier, vol. 18(2), pages 197-215, June.
  5. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.
  6. Evans, Lewis T. & Guthrie, Graeme A., 2005. "Risk, price regulation, and irreversible investment," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 109-128, February.
  7. Neumann, Karl-Heinz & Vogelsang, Ingo, 2013. "How to price the unbundled local loop in the transition from copper to fiber access networks?," 24th European Regional ITS Conference, Florence 2013 88516, International Telecommunications Society (ITS).
  8. Pio Baake & Brigitte Preißl (Eds.). Johannes M. Bauer & Per Björstedt & Elena Gallo & Anders Henten & Sven Lindmark & Martijn Poel & Enzo Pontarollo & Knud Erik Skouby & Jason Whalley, 2006. "Local Loop Unbundling and Bitstream Access: Regulatory Practice in Europe and the U.S," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 20, number pbk20, March.
  9. Guthrie, Graeme & Small, John & Wright, Julian, 2006. "Pricing access: Forward-looking versus backward-looking cost rules," European Economic Review, Elsevier, vol. 50(7), pages 1767-1789, October.
  10. Gabriel Godofredo Fiuza de Bragança, 2005. "A Remuneração de Redes nas Telecomunicações e a Nova Orientação a Custos: Avaliação e Perspectivas Para a Telefonia Fixa Brasileira," Discussion Papers 1104, Instituto de Pesquisa Econômica Aplicada - IPEA.

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