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Dynamic Pricing and Investment from Static Proxy Models

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Author Info
David M. Mandy () (Department of Economics, University of Missouri)
William W. Sharkey (Office of Strategic Planning and Policy Analysis, 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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Publisher Info
Article provided by Concept Economics in its journal Review of Network Economics.

Volume (Year): 2 (2003)
Issue (Month): 4 (December)
Pages: 404-439
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Handle: RePEc:rne:rneart:v:2:y:2003:i:4:p:404-439

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Related research
Keywords: access pricing; telecommunicatons; TELRIC; FCC;

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Mandy, David M, 2002. "TELRIC Pricing with Vintage Capital," Journal of Regulatory Economics, Springer, vol. 22(3), pages 215-49, November. [Downloadable!] (restricted)
  2. Jerry A. Hausman, 1997. "Valuing the Effect of Regulation on New Services in Telecommunications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1997-1), pages 1-54. [Downloadable!]
  3. Timothy J. Tardiff, 2002. "Pricing Unbundled Network Elements and the FCC's TELRIC Rule: Economic and Modeling Issues," Review of Network Economics, Concept Economics, vol. 1(2), pages 132-146, September. [Downloadable!]
  4. Salinger, Michael A, 1998. "Regulating Prices to Equal Forward-Looking Costs: Cost-Based Prices or Price-Based Costs?," Journal of Regulatory Economics, Springer, vol. 14(2), pages 149-63, September. [Downloadable!] (restricted)
  5. Gary Biglaiser & Michael Riordan, 2000. "Dynamics of Price Regulation," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 744-767, Winter.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Ulrich Blum & Christian Growitsch & Niels Krap, 2006. "Network investment and the threat of regulation – preventing monopoly exploitation or infrastructure construction?," IWH Discussion Papers 7-06, Halle Institute for Economic Research. [Downloadable!]
  2. Bauer, Johannes, 2005. "Unbundling Policy in the United States Players, Outcomes and Effects," MPRA Paper 2455, University Library of Munich, Germany. [Downloadable!]
  3. 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. [Downloadable!]
  4. Ulrich Blum & Christian Growitsch & Niels Krap, 2007. "Broadband Investment and the Threat of Regulation: Preventing Monopoly Exploitation or Infrastructure Construction?," Review of Network Economics, Concept Economics, vol. 6(3), pages 342-354, September. [Downloadable!]
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