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Regulation of network industries in the European Union and in Central and Eastern Europe

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  • Major, Iván
  • Kiss, Károly M.
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    Abstract

    Cost-based pricing has dominated the regulatory regime of network industries - and first of all, the regulation of the infocommunications sector - in the European Union since the early 1990s. When privatization of network industries began in Central and Eastern Europe (CEE), one of the main stumbling blocks on the road toward privately owned telecomm companies and postal services, energy producers and distributors, and other network industries was the lack of efficient and up-to-date industry regulations. From the mid-1990s, accessing countries that later became members of the EU, and other CEE countries that are still waiting for admission swiftly adopted the regulatory framework of the European Union. The EU has been striving for market opening and liberalization in these industries; it abolished industry regulation in several segments of the market of network industries. Now it applies so-called cost-based pricing in areas where regulation is still in place. CEE countries now use the same type of regulation as the advanced member states of the EU. But the regulatory capacity of most CEE countries is still far behind of their West European counterparts. Experts of network industries advocate, and telecommunications, energy and other market regulators in various parts of the world practice, cost-based pricing for inter-firm network access services. Cost-based pricing is carried out under the assumption that the regulator has perfect information regarding the costs of producing the services. We show in this paper that - under fairly general conditions - cost-based pricing creates incentives for regulated firms not to improve their efficiency. We also show that cost-based pricing results in smaller consumer welfare than incentive regulation that takes into account the existence of information asymmetry between the regulator and the firm. A model of interconnection with adverse selection and moral hazard is presented. --

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    Bibliographic Info

    Paper provided by International Telecommunications Society (ITS) in its series 22nd European Regional ITS Conference, Budapest 2011: Innovative ICT Applications - Emerging Regulatory, Economic and Policy Issues with number 52194.

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    Date of creation: 2011
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    Handle: RePEc:zbw:itse11:52194

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    Web page: http://www.itseurope.org/

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    Keywords: network industries; regulation; incentive contracts;

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    1. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-50, June.
    2. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
    3. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
    4. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
    5. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    6. Madarasz, Kristof, 2008. "Information projection: model and applications," MPRA Paper 38612, University Library of Munich, Germany, revised 2011.
    7. 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.
    8. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    9. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
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