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

Gasmi, Farid, Laffont, Jean-Jacques, Sharkey, William W. and Valero, Vanessa (1997) Incentive Regulation and The Cost Structure of The Local Telephone Exchange Network. Journal of Regulatory Economics, 12. pp. 5-25.

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Official URL: http://tse-fr.eu/pub/715

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.

Item Type: Article
Language: English
Date: 1997
Refereed: Yes
Subjects: B- ECONOMIE ET FINANCE
B- ECONOMIE ET FINANCE > B3- Transport et Communication
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 18 Jan 2012 05:55
Last Modified: 07 Mar 2018 13:21
OAI ID: oai:tse-fr.eu:715
URI: http://publications.ut-capitole.fr/id/eprint/2536

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