Download Regulation

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
Changed role of
telecommunications regulation
• Before the 1970’s:
– To protect from the abuses of monopoly power
• Since the 1970’s (especially since 1996):
– To facilitate the development (and
maintenance) of competition
More on changed role of
regulation
• Before the 1970’s:
– Emphasis on regulating price, earnings and
service delivery by monopoly company
• Since the 1970’s (especially since 1996):
– Emphasis on interconnection among all
companies (asymmetric regulation)
Theories of Regulation
• Public Interest
• Interest Group/Coalition Building (Public
Choice)
• Capture
• Life Cycle
• Equity-Stability
• Organizational
Purpose of regulation
• At least in theory:
– To protect the public interest
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
Bases for Regulation
• Basic laws of the land (Constitution)
• Case Law
• Legislation
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
• State
– Tenth Amendment of the Constitution
• Police powers of the state
Limitations on Regulation
• Federal
– Fifth Amendment
• Due process
• Takings clause
• State
– Fourteenth Amendment
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)
Cases
• Munn v. Illinois: monopoly
• German Alliance v. Lewis: necessity
• Nebbia v. New York: virtually any
enterprise if legislators deem it necessary to
protect the public
Public Utilities
• Usually regulated
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•
•
•
What are they?
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
• Usually “natural monopolies”
• Demand and price inelastic
Demand characteristics of a public
utility
• 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
What do inelasticities mean?
• The service is a necessity.
Definitions of a “natural
monopoly”
• Supply based
• Demand based
Supply based definition of a
public utility
• Economies of scale/scope:
– 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
• Significant fixed and non-liquid investment
(often called sunk costs)
• Problems of unused capacity (engineered
for peak demand)
Demand based characteristics of
a public utility
• Diversity of demand—instantaneous and
uninterrupted services at peak and off-peak
times
Market structures
• Perfect competition
– Products offered are homogeneous and perfectly
substitutable for one another
– Large number of buyers and sellers with none big
enough to affect total supply or demand
– Buyers and sellers have complete information about
market conditions
– There is complete freedom to enter or exit the market
– IT DOESN’T EXIST
Marginal revenue/Marginal cost
Regulation needed 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
Common Carriage
• What is it?
• Examples?
Definition in the Comm Act of 1934
• 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
Franchise law
• The granting of a monopoly in return for the
performance of specific duties.
• Some telephone companies in the US were
granted franchises.
Telephone regulation
• Combination of common carriage and
franchise law:
– Behave as a common carrier
– Receive a monopoly franchise
– Perform specific duties, including operating as
a carrier of last resort
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