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Cross-Subsidization and Cost Misallocation by Regulated Monopolists

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  • Brennan, Timothy J

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

Suggested Citation

  • Brennan, Timothy J, 1990. "Cross-Subsidization and Cost Misallocation by Regulated Monopolists," Journal of Regulatory Economics, Springer, vol. 2(1), pages 37-51, March.
  • Handle: RePEc:kap:regeco:v:2:y:1990:i:1:p:37-51
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    References listed on IDEAS

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    1. Weisman, Dennis L, 1993. "Superior Regulatory Regimes in Theory and Practice," Journal of Regulatory Economics, Springer, vol. 5(4), pages 355-366, December.
    2. Laffont, Jean-Jacques & Tirole, Jean, 1994. "Access pricing and competition," European Economic Review, Elsevier, vol. 38(9), pages 1673-1710, December.
    3. Lyon, Thomas P, 1996. "A Model of Sliding-Scale Regulation," Journal of Regulatory Economics, Springer, vol. 9(3), pages 227-247, May.
    4. Armstrong, Mark & Vickers, John, 1998. "The Access Pricing Problem with Deregulation: A Note," Journal of Industrial Economics, Wiley Blackwell, vol. 46(1), pages 115-121, March.
    5. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
    6. Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-953, October.
    7. Weisman, Dennis L., 2001. "Access pricing and exclusionary behavior," Economics Letters, Elsevier, vol. 72(1), pages 121-126, July.
    8. Klemperer, Paul D & Meyer, Margaret A, 1989. "Supply Function Equilibria in Oligopoly under Uncertainty," Econometrica, Econometric Society, vol. 57(6), pages 1243-1277, November.
    9. Clemenz, Gerhard, 1991. "Optimal Price-Cap Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 391-408, June.
    10. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, January.
    11. Cabral, Luis M B & Riordan, Michael H, 1989. "Incentives for Cost Reduction under Price Cap Regulation," Journal of Regulatory Economics, Springer, vol. 1(2), pages 93-102, June.
    12. Economides, Nicholas, 1998. "The incentive for non-price discrimination by an input monopolist," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 271-284, May.
    13. Aleksandr Rudkevich & Max Duckworth & Richard Rosen, 1998. "Modeling Electricity Pricing in a Deregulated Generation Industry: The Potential for Oligopoly Pricing in a Poolco," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 19-48.
    14. Weisman, Dennis L, 1995. "Regulation and the Vertically Integrated Firm: The Case of RBOC Entry into Interlata Long Distance," Journal of Regulatory Economics, Springer, vol. 8(3), pages 249-266, November.
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    Cited by:

    1. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, pages 325-366.
    2. Calzolari, Giacomo & Scarpa, Carlo, 2007. "Regulating a Multi-Utility Firm," CEPR Discussion Papers 6238, C.E.P.R. Discussion Papers.
    3. Timothy J. Brennan, 2013. "Energy Efficiency Policy Puzzles," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    4. 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.
    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. Sappington, David E. M., 2003. "Regulating horizontal diversification," International Journal of Industrial Organization, Elsevier, vol. 21(3), pages 291-315, March.
    7. David, Guy & Lindrooth, Richard C. & Helmchen, Lorens A. & Burns, Lawton R., 2014. "Do hospitals cross-subsidize?," Journal of Health Economics, Elsevier, vol. 37(C), pages 198-218.
    8. Carlo Scarpa & Giacomo Calzolari, 2009. "On Regulation and Competition: Pros and Cons of a Diversified Monopolist," Working Papers 2009.55, Fondazione Eni Enrico Mattei.
    9. Giacomo Calzolari & Carlo Scarpa, 2016. "Conglomerates And Regulation," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1648-1669, July.
    10. Brennan, Timothy, 2005. "Alleged Transmission Undersupply: Is Restructuring the Cure or the Cause?," Discussion Papers dp-05-50, Resources For the Future.
    11. 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.
    12. John W. Mayo & David E. M. Sappington, 2016. "Regulation in a ‘Deregulated’ Industry: Railroads in the Post-Staggers Era," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(2), pages 203-227, September.
    13. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    14. Brennan, Timothy J., 2011. "Energy Efficiency Policy: Surveying the Puzzles," Discussion Papers dp-11-27, Resources For the Future.
    15. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
    16. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.
    17. Mark L. Burton & David L. Kaserman & John W. Mayo, 2009. "Common Costs And Cross-Subsidies: Misestimation Versus Misallocation," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 193-199, April.
    18. 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.

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