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Is Protecting Sunk Investments by Consumers a Key Rationale for Natural Monopoly Regulation?

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  • Biggar Darryl

    (Australian Competition and Consumer Commission and Australian Energy Regulator)

Abstract

Why regulate natural monopolies? Conventional economic theory points to the price-marginal cost margin and the ensuing deadweight loss. But this hypothesis does a poor job of explaining the way that regulators behave in practice. This paper proposes an alternative hypothesis: that natural monopoly regulation exists to protect the sunk investments made by consumers of the regulated firm. This hypothesis explains many of the practices of regulators which make little or no sense under conventional economic theory, such as the desire to pursue stable prices, the aversion to Ramsey pricing, and the role of incremental cost as a pricing floor.

Suggested Citation

  • Biggar Darryl, 2009. "Is Protecting Sunk Investments by Consumers a Key Rationale for Natural Monopoly Regulation?," Review of Network Economics, De Gruyter, vol. 8(2), pages 1-25, June.
    • Handle: RePEc:bpj:rneart:v:8:y:2009:i:2:n:1
    DOI: 10.2202/1446-9022.1173
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    Citations

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    Cited by:

    1. Vogelsang, Ingo, 2017. "The role of competition and regulation in stimulating innovation – Telecommunications," Telecommunications Policy, Elsevier, vol. 41(9), pages 802-812.
    2. Darryl Biggar, 2013. "'Why Johnny Can't Regulate': A Reply to Henry Ergas," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 20(2), pages 105-110.
    3. Kenneth Button, 2020. "Studying the empirical implications of the liberalization of airport markets," Competition and Regulation in Network Industries, , vol. 21(3), pages 223-243, September.
    4. Biggar, Darryl & Söderberg, Magnus, 2020. "Empirical analysis of how political ideology and ownership influence price stability in the Swedish district heating market," Energy Policy, Elsevier, vol. 145(C).
    5. Havyatt, David, 2022. "Toward consumer-centric energy network regulation: Australia's experience," Utilities Policy, Elsevier, vol. 78(C).
    6. Hesamzadeh, Mohammad R. & Biggar, Darryl R. & Hosseinzadeh, Nasser, 2011. "The TC-PSI indicator for forecasting the potential for market power in wholesale electricity markets," Energy Policy, Elsevier, vol. 39(10), pages 5988-5998, October.
    7. Darryl Biggar, 2010. "Fairness in Public-utility Regulation: A Theory," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 17(1), pages 5-32.
    8. Darryl Biggar & Matthieu Glachant & Magnus Söderberg, 2018. "Monopoly regulation when customers need to make sunk investments: evidence from the Swedish district heating sector," Journal of Regulatory Economics, Springer, vol. 54(1), pages 14-40, August.
    9. Crawford, Garth, 2015. "Network depreciation and energy market disruption: Options to avoiding passing costs down the line," Economic Analysis and Policy, Elsevier, vol. 48(C), pages 163-171.
    10. Biggar, Darryl, 2022. "Seven outstanding issues in energy network regulation," Energy Economics, Elsevier, vol. 115(C).
    11. Leroux, Anke & Söderberg, Magnus, 2023. "Network Regulation under electoral competition," Energy Economics, Elsevier, vol. 120(C).
    12. Biggar, Darryl, 2010. "Exit fees and termination fees revisited: funding irrigation infrastructure in a manner compatible with water trade," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), pages 1-15.
    13. Lohmann, Gui & Trischler, Jakob, 2017. "Licence to build, licence to charge? Market power, pricing and the financing of airport infrastructure development in Australia," Transport Policy, Elsevier, vol. 59(C), pages 28-37.

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