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Regulation
• Private rights versus public needs
Why Regulate?
• If competition cannot exist, or survive long,
and an unregulated market will not produce
competitive results
• If competition does exist, but because of
imperfections in the market, competition
does not produce competitive results
• If competitive results are unsatisfactory
because of other policy considerations
Role of regulation
• Perform the balancing of interests that the
market provides in a competitive
marketplace
– Interests of buyers versus sellers
– Interests of subscribers versus stockholders
Legal Bases for Regulation
• Federal
– Article I, Section 8 of the Constitution
• Commerce clause
– Article VI of the Constitution
• Constitution as supreme law of the land
– Federal regulation of intrastate commerce only to
remove unjustly discriminatory inequalities or
unreasonable preferences
• State
– Tenth Amendment of the Constitution
• Police powers of the state
Limitations on Regulation
• Federal
– Fifth Amendment
• Due process
• Takings clause
– Article I, Section 10
• No state laws to impair the obligation of contracts
• State
– Fourteenth Amendment
Theories of Regulation
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Public Interest
Interest Group/Coalition Building
Capture
Life Cycle
Equity-Stability
Organizational
Origins of public interest concept
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Just price doctrine of medieval times
Trade guilds of the middle ages
French royal charters
Common callings
Case law
• “Property does become clothed with a public
interest when used in a manner to make it of
public consequence, and affect the community at
large. When, therefore, one devotes his property to
a use in which the public has an interest, he, in
effect grants to the public an interest in that use,
and must submit to be controlled by the public for
the common good.” Munn v. Illinois (1877)
Common Carriage
• What is it?
• Examples?
Definition in the Comm Act
• Common Carrier for Hire
– Applies to messages transmitted by wire or
radio
– Controls transmission (carrier)
– Provides nondiscriminatory service (common)
– Provides services for hire (profit)
– Does not apply to broadcasting
Obligations and Privileges
• Obligations
– Charge reasonable and non-discriminatory rates
– Provide adequate service
– Accept all customers on the same terms without
discrimination
• Privileges
– Limitations on liability
Public Utilities
• What are they?
– More than common carriage
– Provide “essential services”
• How are they created?
• Obligations?
• Rights?
Public utility categories
• Enterprises which supply, directly or
indirectly, continuous or repeated services
through more or less permanent physical
connections between the plant of the
supplier and the premises of the consumer
– Traditionally electric, gas, water, telephone
• Public transportation agencies
Public utility characteristics
• Capital intensive
• Sell services rather than goods
• Have to engineer their systems to deal with
peak demand
• “natural monopolies”
– Note: While public utilities are natural
monopolies, not all natural monopolies are
public utilities
Potential Sources of Monopoly
• Key resource is owned by one firm
• Government gives franchise to only one firm
• The concept we are discussing here:
– Cost of production makes a single producer
more efficient (natural monopoly)
Definitions of a “public utility”
(and to some extent, a natural monopoly)
• Supply based
• Demand based
Supply based definition
• Economies of scale/scope (natural
monopoly):
– When a single firm can supply a good or
service to an entire market at a smaller cost
than could two or more firms
• Economies of scale and/or scope over a relevant
range of output
More supply based
characteristics (public utility)
• Significant fixed and non-liquid investment
(often called sunk costs)
• Problems of unused capacity (engineered
for peak demand)
• Technical limitations
Demand based characteristics
(public utility)
• Diversity of demand—instantaneous and
uninterrupted services at peak and off-peak
times
• Position of the consumer—close connection
between provider and premises restricting
choice
• Inelasticity of demand—both price and
income
Elasticity of Demand
• Price elasticity of demand
– If when price goes up, demand goes down, then
demand is elastic
– If when price goes up, demand stays the same, then
demand is inelastic
• Income elasticity of demand
– If when income goes down, expenditure level goes
down, demand is elastic
– If when income goes down, expenditure level stays the
same or doesn’t decrease in proportion, demand is
inelastic
Elasticity examples
• Price
demand
= elastic
• Price
demand
= inelastic
• Income
demand
= elastic
• Income
demand
= inelastic
Regulation to control abuses of
monopoly power
• Monopoly pricing
– Output set at less than the most socially
efficient levels of production
– Prices higher than the most socially efficient
level
– Discriminatory pricing
• Service provision
• Service quality
Example of Monopoly Pricing
• Assume that 12 people are willing to pay $6 for an
item that costs $5 to produce at this quantity:
– Revenue is
$6 x 12 units = $72
– Cost is
$5 x 12 units = $60
– Profit is $72 - $60 = $12
• Assume that 8 people are willing to pay $8 for the
item, that costs $6 to produce at this quantity:
– Revenue is
$8 x 8 units = $64
– Cost is $6 x 8 units = $48
– Profit is $64 - $48 = $16
Regulation to encourage
competition
• Asymmetrical regulation
– Not a level playing field—on purpose
• Control activities of dominant firm
– Pricing
• Avoid cost subsidization
• Avoid predatory pricing
– Interactions with competitors
• Require interconnection
• Require provision of essential facilities