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Incentive Regulation and the Cost Structure of the Local Telephone Exchange Network

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  • Gasmi, F
  • Laffont, Jean-Jacques
  • Sharkey, W W

Abstract

This paper combines an engineering process model of the cost of local exchange telecommunications firms with an analytical model of optimal incentive regulation (with ex post cost observability), to study empirically the properties of the optimal regulatory mechanism. Relying on detailed properties of the cost function, we examine three issues: (i) the extent of natural monopoly when informational rents associated with regulation are taken into account; (ii) the extent of incentive correction, which expresses the divergence of pricing under the optimal mechanism from optimal pricing under complete information; (iii) the implementation of optimal regulation through a menu of linear contracts. Our findings are that, for fixed territory, strong economies of scale allow local exchange telecommunications to retain monopoly characteristics even when the (informational) costs of regulation are properly accounted for, the incentive correction term is small in magnitude, and that optimal regulation can be well approximated through relatively simple linear contracts. Copyright 1997 by Kluwer Academic Publishers

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Bibliographic Info

Article provided by Springer in its journal Journal of Regulatory Economics.

Volume (Year): 12 (1997)
Issue (Month): 1 (July)
Pages: 5-25

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Handle: RePEc:kap:regeco:v:12:y:1997:i:1:p:5-25

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Web page: http://www.springerlink.com/link.asp?id=100298

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Cited by:
  1. Philippe Gagnepain, 2001. "La nouvelle théorie de la régulation des monopoles naturels : fondements et tests," Post-Print hal-00622947, HAL.
  2. Philippe Gagnepain & Marc Ivaldi, 2002. "Incentive Regulatory policies: The Case of Public Transit Systems in France," Post-Print hal-00622846, HAL.
  3. Ingo Vogelsang, 2003. "Price Regulation of Access to Telecommunications Networks," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 830-862, September.
  4. David Hawdon & Lester C. Hunt & Paul Levine & Neil Rickman, 2007. "Optimal sliding scale regulation: an application to regional electricity distribution in England and Wales," Oxford Economic Papers, Oxford University Press, vol. 59(3), pages 458-485, July.
  5. Gasmi, Farid & Laffont, Jean-Jacques & Sharkey, William, 1999. "Competition, Universal Service and Telecommunications Policy in Developing Countries," IDEI Working Papers 92, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Gagnepain, Philippe & Ivaldi, Marc, 2010. "Contract Choice, Incentives, and Political Capture in the Public Sector," CEPR Discussion Papers 8053, C.E.P.R. Discussion Papers.
  7. Philippe Gagnepain, & Marc Ivaldi, 2009. "Contract choice, incentives and political capture in public transport services," Economics Working Papers we096641, Universidad Carlos III, Departamento de Economía.
  8. Gasmi, F. & Laffont, J. J. & Sharkey, W. W., 2002. "The natural monopoly test reconsidered: an engineering process-based approach to empirical analysis in telecommunications," International Journal of Industrial Organization, Elsevier, vol. 20(4), pages 435-459, April.
  9. Willner, Johan, 2006. "Privatisation and liberalisation in an industry with network externalities," Economics Letters, Elsevier, vol. 91(2), pages 197-203, May.
  10. repec:hal:cesptp:hal-00622963 is not listed on IDEAS
  11. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2009. "Renégotiation de contrats dans l'industrie du transport urbain en France," Post-Print hal-00622833, HAL.
  12. Carlos Perez Montes, 2012. "Regulatory bias in the price structure of local telephone services," Banco de Espa�a Working Papers 1201, Banco de Espa�a.
  13. Christopher C. Klein, 2007. "Productivity Growth in Telecommunications: The Case of Tennessee," Working Papers 200714, Middle Tennessee State University, Department of Economics and Finance.

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