Network Access Pricing and “Light Handed” Regulation: A Comparative Institutional Analysis

Optimal regulatory framework choice is analyzed for network (unbundled) industries, by developing a comparative institutional analysis of network access price regulation and "light handed" regulation. The former constitutes a more hierarchy-like governance response. The latter represents a more market-like institutional solution to the regulatory problem. While the former is a specific agency-based arrangement (with a higher degree of political influence), the latter is a court-based system. Consequently, the main trade-off between both frameworks reflects the costs and benefits of having efficient political and/or judicial institutions. Price regulation is superior when the regulator's distributional concerns are irrelevant and the degree of the informational asymmetry is lower. A poorly functioning political system and a high welfare cost of raising public funds makes price regulation less attractive. On the other hand, light regulation is more attractive when the potential rents are smaller, the monopolist is more risk averse, the judicial system is more efficient, and the threat of regulator's auditing is more credible. The possibility of private transfers among firms makes price regulation more advantageous, while a higher information asymmetry among firms makes light handed regulation more attractive. The main results are consistent with a plausible interpretation of the drastic deregulatory process in New Zealand.