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Regulatory Measurement and Evaluation of Telephone Service Quality

Author

Listed:
  • John G. Lynch

    (College of Business Administration, University of Florida, Gainesville, Florida 32611)

  • Thomas E. Buzas

    (Anjoy QSP\trademark , Ann Arbor, Michigan 48108)

  • Sanford V. Berg

    (College of Business Administration, University of Florida, Gainesville, Florida 32611)

Abstract

Regulators of utilities that operate as local monopolies would like to set prices or allow rates of return based upon the quality of a utility's service. However, quality is highly multidimensional. Traditionally, regulators have collected measures of quality on many separate dimensions, and compared performance on these dimensions to explicit pass-fail standards. They have lacked a method of combining complex patterns of substandard and superstandard performance on these many dimensions to arrive at an overall evaluation of the quality of service. To redress this problem, we first describe the information processing problems regulators encounter when they attempt to integrate this complex array of information intuitively, and the problems that arise when the link between service quality (as reflected in patterns of passed and failed standards) and regulatory incentives is not made explicit to utility management. We develop a bootstrapped method for formalizing each expert regulator's evaluation policy using hierarchical conjoint analysis, and apply this method to the evaluation of local telephone companies by the Florida Public Service Commission (FPSC). We show that experts within the FPSC, the regulated utilities, and a large telephone customer exhibit very high agreement about how the various dimensions of quality should be differentially weighted. We derive a consensus measure of overall quality, Q\^, and identify a score associated with meeting all standards exactly, Q\^*. Utilities can then be rewarded based upon whether or not they exceed Q\^*, rather than on the basis of how many standards are met. Compared with a pattern in which each standard is met exactly, there exist patterns of mixed substandard and superstandard performance on the individual dimensions of quality that are less costly to produce and higher in overall quality. We compare utility incentives when rewards are based upon Q\^ to those under the current pass-fail regime.

Suggested Citation

  • John G. Lynch & Thomas E. Buzas & Sanford V. Berg, 1994. "Regulatory Measurement and Evaluation of Telephone Service Quality," Management Science, INFORMS, vol. 40(2), pages 169-194, February.
  • Handle: RePEc:inm:ormnsc:v:40:y:1994:i:2:p:169-194
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    File URL: http://dx.doi.org/10.1287/mnsc.40.2.169
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    Citations

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    Cited by:

    1. Resende, Marcelo & Otavio Facanha, Luis, 2005. "Price-cap regulation and service-quality in telecommunications: an empirical study," Information Economics and Policy, Elsevier, vol. 17(1), pages 1-12, January.
    2. Weisman, Dennis L., 2005. "Price regulation and quality," Information Economics and Policy, Elsevier, vol. 17(2), pages 165-174, March.
    3. Chen Lin & Sanford Berg, 2008. "Incorporating Service Quality into Yardstick Regulation: An Application to the Peru Water Sector," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 32(1), pages 53-75, February.
    4. David Sappington & Dennis Weisman, 2010. "Price cap regulation: what have we learned from 25 years of experience in the telecommunications industry?," Journal of Regulatory Economics, Springer, vol. 38(3), pages 227-257, December.
    5. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    6. Facanha, Luis Otavio & Resende, Marcelo, 2004. "Price cap regulation, incentives and quality:: The case of Brazilian telecommunications," International Journal of Production Economics, Elsevier, vol. 92(2), pages 133-144, November.

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