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Incentive Regulation and the Cost Structure of the Local Telephone Exchange Network

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  • Gasmi, F
  • Laffont, Jean-Jacques
  • Sharkey, W W

Abstract

This paper combines an engineering process model of the cost of local exchange telecommunications firms with an analytical model of optimal incentive regulation (with ex post cost observability), to study empirically the properties of the optimal regulatory mechanism. Relying on detailed properties of the cost function, we examine three issues: (i) the extent of natural monopoly when informational rents associated with regulation are taken into account; (ii) the extent of incentive correction, which expresses the divergence of pricing under the optimal mechanism from optimal pricing under complete information; (iii) the implementation of optimal regulation through a menu of linear contracts. Our findings are that, for fixed territory, strong economies of scale allow local exchange telecommunications to retain monopoly characteristics even when the (informational) costs of regulation are properly accounted for, the incentive correction term is small in magnitude, and that optimal regulation can be well approximated through relatively simple linear contracts. Copyright 1997 by Kluwer Academic Publishers

Suggested Citation

  • Gasmi, F & Laffont, Jean-Jacques & Sharkey, W W, 1997. "Incentive Regulation and the Cost Structure of the Local Telephone Exchange Network," Journal of Regulatory Economics, Springer, vol. 12(1), pages 5-25, July.
    • Handle: RePEc:kap:regeco:v:12:y:1997:i:1:p:5-25
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    Cited by:

    1. Philippe Gagnepain & Marc Ivaldi, 2009. "Contract choice, incentives, and political capture in public transport services," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00622963, HAL.
    2. Philippe Gagnepain & Marc Ivaldi, 2002. "Incentive Regulatory Policies: The Case of Public Transit Systems in France," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 605-629, Winter.
    3. Christopher C. Klein, 2007. "Productivity Growth in Telecommunications: The Case of Tennessee," Working Papers 200714, Middle Tennessee State University, Department of Economics and Finance.
    4. Garrett, Daniel F., 2020. "Payoff Implications of Incentive Contracting," TSE Working Papers 20-1140, Toulouse School of Economics (TSE).
    5. Ivaldi, Marc & Pouyet, Jerome, 2018. "Eliciting the regulation of an economic system: The case of the French rail industry," Transport Policy, Elsevier, vol. 62(C), pages 21-30.
    6. Vogelsang, Ingo, 2000. "Regulation of Access to the Telecommunications Network of New Zealand: A Review of the Literature," Working Paper Series 19030, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    7. Ingo Vogelsang, 2003. "Price Regulation of Access to Telecommunications Networks," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 830-862, September.
    8. Nick Wills‐Johnson, 2008. "Separability and Subadditivity in Australian Railways," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 95-108, March.
    9. Philippe Gagnepain & Marc Ivaldi & David Martimort, 2009. "Renégociation de contrats dans l'industrie du transport urbain en France," Revue économique, Presses de Sciences-Po, vol. 60(4), pages 927-947.
    10. Vogelsang, Ingo, 2000. "Regulation of Access to the Telecommunications Network of New Zealand: A Review of the Literature," Working Paper Series 3931, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    11. Philippe Gagnepain, 2001. "La nouvelle théorie de la régulation des monopoles naturels : fondements et tests," Post-Print hal-00622947, HAL.
    12. Gagnepain, Philippe & Ivaldi, Marc, 2010. "Regulatory Schemes and Political Capture in a Local Public Sector," IDEI Working Papers 609, Institut d'Économie Industrielle (IDEI), Toulouse.
    13. Gasmi, F. & Laffont, J. J. & Sharkey, W. W., 2002. "The natural monopoly test reconsidered: an engineering process-based approach to empirical analysis in telecommunications," International Journal of Industrial Organization, Elsevier, vol. 20(4), pages 435-459, April.
    14. Carlos Perez Montes, 2012. "Regulatory bias in the price structure of local telephone services," Working Papers 1201, Banco de España.
    15. Philippe Gagnepain & Marc Ivaldi, 2002. "Asymétries d'information et richesse immatérielle de l'entreprise," Revue Française d'Économie, Programme National Persée, vol. 16(3), pages 129-153.
    16. Committee, Nobel Prize, 2014. "Market power and regulation (scientific background)," Nobel Prize in Economics documents 2014-2, Nobel Prize Committee.
    17. David Hawdon & Lester C. Hunt & Paul Levine & Neil Rickman, 2007. "Optimal sliding scale regulation: an application to regional electricity distribution in England and Wales," Oxford Economic Papers, Oxford University Press, vol. 59(3), pages 458-485, July.
    18. Ivaldi, Marc & Gagnepain, Philippe, 2010. "Contract Choice, Incentives, and Political Capture in the Public Sector," CEPR Discussion Papers 8053, C.E.P.R. Discussion Papers.
    19. Willner, Johan, 2006. "Privatisation and liberalisation in an industry with network externalities," Economics Letters, Elsevier, vol. 91(2), pages 197-203, May.
    20. Garrett, Daniel F., 2014. "Robustness of simple menus of contracts in cost-based procurement," Games and Economic Behavior, Elsevier, vol. 87(C), pages 631-641.
    21. Gasmi, F. & Laffont, J. J. & Sharkey, W. W., 2000. "Competition, universal service and telecommunications policy in developing countries," Information Economics and Policy, Elsevier, vol. 12(3), pages 221-248, September.
    22. repec:vuw:vuwscr:19030 is not listed on IDEAS

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