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Cross-Subsidization and Cost Misallocation by Regulated Monopolists

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  • Brennan, Timothy J
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    Abstract

    While cross-subsidization is understood theoretically as involving the sustainability of a cost allocation scheme, it is invoked in regulatory policy contexts, such as the divestiture of AT&T, where costs of serving unregulated markets may be borne by ratepayers of regulated monopolies. The authors analyze two cross-subsidization tactics--cost misallocation and distorted technological choice--under a spectrum of regulatory cost allocation policies. These tactics lead to higher prices in regulated markets and inefficient production in unregulated markets. Welfare effects are discussed; concludes with observations on strategic behavior and regulatory policy. Copyright 1990 by Kluwer Academic Publishers

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    Bibliographic Info

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

    Volume (Year): 2 (1990)
    Issue (Month): 1 (March)
    Pages: 37-51

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    Handle: RePEc:kap:regeco:v:2:y:1990:i:1:p:37-51

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

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    Cited by:
    1. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    2. Mark Armstrong & David Sappington, 2005. "Regulation, Competition and Liberalization," Industrial Organization 0505011, EconWPA, revised 07 Oct 2005.
    3. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.
    4. Amundsen, Eirik S. & Andersen, Per & Jensen, Frank, 2011. "Testing for cross-subsidisation in the combined heat and power generation sector: A comparison of three tests," Energy Economics, Elsevier, vol. 33(5), pages 750-757, September.
    5. Fernando T. Camacho & Flavio M. Menenzes, 2007. "The Contamination Problem in Utility Regulation," Discussion Papers Series 352, School of Economics, University of Queensland, Australia.
    6. White, Lawrence J., 2000. "US telephone deregulation: lessons to be learned, mistakes to be avoided," Japan and the World Economy, Elsevier, vol. 12(2), pages 173-183, May.
    7. R. Richard Geddes, 2008. "Pricing by state-owned enterprises: the case of postal services," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(7), pages 575-591.
    8. Sappington, David E. M., 2003. "Regulating horizontal diversification," International Journal of Industrial Organization, Elsevier, vol. 21(3), pages 291-315, March.
    9. Carlo Scarpa & Giacomo Calzolari, 2009. "On Regulation and Competition: Pros and Cons of a Diversified Monopolist," Working Papers 2009.55, Fondazione Eni Enrico Mattei.
    10. Brennan, Timothy J., 2011. "Energy Efficiency Policy: Surveying the Puzzles," Discussion Papers dp-11-27, Resources For the Future.
    11. Calzolari, Giacomo & Scarpa, Carlo, 2007. "Regulating a Multi-Utility Firm," CEPR Discussion Papers 6238, C.E.P.R. Discussion Papers.

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