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The (In)efficiency of the retail-minus rule

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  • Weisman, Dennis L.

Abstract

The Retail-Minus Rule (RMR) specifies that the rate for a mandated wholesale service is set by subtracting from the vertically integrated provider's (VIP's) retail price the costs it avoids by selling the wholesale service rather than the retail service. While the RMR offers regulators an expedient method for setting wholesale prices, we show that it is efficient only under restrictive conditions. The proper test for a price squeeze inquires whether the VIP's retail price is greater than or equal to the sum of the direct cost and the opportunity cost of supplying the retail service. The RMR passes this test only when the competing retail services are perfect substitutes.

Suggested Citation

  • Weisman, Dennis L., 2021. "The (In)efficiency of the retail-minus rule," Utilities Policy, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:juipol:v:70:y:2021:i:c:s0957178721000540
    DOI: 10.1016/j.jup.2021.101220
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    References listed on IDEAS

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    1. Perry, Martin K., 1989. "Vertical integration: Determinants and effects," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 4, pages 183-255, Elsevier.
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    3. repec:reg:rpubli:608 is not listed on IDEAS
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    More about this item

    Keywords

    Margin squeeze; Economic regulation; Competition; Vertical integration;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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