Incentive regulation and telco performance: A primer

Telecommunications Policy

Volumn 20, Issue 9, 1996, Pages 641-652

  Berg, Sanford V ^a   Foreman, R Dean ^b  

^a UNIVERSITY OF FLORIDA   (United States)

^b Forecasting Group ATT ^*  (United States)

Author keywords

[No Author keywords available]

Indexed keywords

COST EFFECTIVENESS; LAWS AND LEGISLATION; MODERNIZATION; PUBLIC POLICY; TELECOMMUNICATION SYSTEMS;

INCENTIVE REGULATION; TELECOMMUNICATION COMPANIES;

TELECOMMUNICATION CONTROL;

EID: 0030290808     PISSN: 03085961     EISSN: None     Source Type: Journal    
DOI: 10.1016/S0308-5961(96)00043-2     Document Type: Article

References (30)

1. Kridel, D J, Sappington, D E M and Weisman, D L 'The effects of incentive regulation in the telecommunications industry: a survey' Journal of Regulatory Economics 1996 9(3) 269-306.
2. Lawton, R W, Marvel, M, Rosenberg, E A and Zearfoss, N 'Measuring the impact of alternative pricing reforms in telecommunications' NRRI 94-30, Columbus, OH: National Regulatory Research Institute (1994).
3. To avoid both inefficient competition and discourage inefficient monopoly, Haring proposes eliminating barriers created by both incumbents and regulators. His observations regarding the limitations of status quo regulation are quite consistent with the themes developed in this paper. Haring, J 'Can local telecommunications be self-policing? A proposed discovery procedure' Telecommunications Policy 1995 19 (2) 91-104.
4. Factors influencing supply and demand determine the efficient configuration of the industry (which also must take into account any external effects and social objectives, such as universal service). The features noted earlier were associated historically with a single supplier as being the least-cost arrangement for producing the quantity demanded.
5. In the absence of regulation, basic conditions facing an industry determine the number and size distribution of suppliers that are feasible in an industry. Causation runs from the basic conditions to industry structure (entry conditions, number of firms, degree of vertical integration, and product differentiation). Industry structure influences, in turn, the behaviors likely to be observed (prices, promotion, research and development, production process changes, and new service introductions). The market outcomes can then be described in terms of performance criteria (profitability, efficiency, innovation, and meeting other social objectives). Clearly, there are feedbacks in this process - for example, high levels of research and development (R&D) can lead to innovations that affect the production technologies and entry conditions. Given the role of regulation in restricting entry historically, the resulting R&D feedbacks were probably substantial. It was not in the interest of incumbent firms to develop technologies that would disrupt existing patterns of production.
6. The irony is that the transition to greater competition often involves new types of regulation rather than less regulation during the evolution to new industry structures. Numerous contentious issues remain: funding universal service, maintaining network interoperability, ensuring service quality, developing number portability, continuing supplier-of-last-resort obligations, determining the appropriate extent of unbundling, and designing efficient prices for network components. The politics of regulation are such that regulators dare not withdraw from the field before they are confident that politically powerful consumer groups are, indeed, protected from the exercise of residual market power. Similarly, to the extent that policy-makers can operate as honest brokers in the development of complex contracts in vertical markets, they may be able to make the transition to competitive markets less disruptive. However, involvement in these negotiations (or dictating new supply arrangements) requires different types of regulation than in the past. To some extent, hearing rooms will continue to serve as the arbiters of outcomes-limiting the role of the marketplace in rewarding good performance.
7. Donald, S G and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' Journal of Economics and Management Strategy 1995 4 (2) 237-265) have shown that the likelihood that a state will replace rate of return regulation with incentive regulation is positively related to a number of factors: relatively high residential basic local service rates, particularly high or low allowed earnings under ROR regulation, state leaders do not tend to come from a single party, relatively rapid urban population growth, and relatively less bypass activity by competitors in the state. Their study supports the endogeneity of regulatory policy, which brings into question a number of existing studies purporting to explain the differential impacts of particular regulations.
8. Stigler, G 'The theory of economic regulation' Bell Journal of Economics and Management Science 1971 2 (1) 1-21; Peltzman, S 'Toward a more general theory of regulation' The Journal of Law and Economics 1976 19 (2) 211-240
9. Stigler, G 'The theory of economic regulation' Bell Journal of Economics and Management Science 1971 2 (1) 1-21; Peltzman, S 'Toward a more general theory of regulation' The Journal of Law and Economics 1976 19 (2) 211-240
10. Sappington, D E M 'Designing incentive regulation' Review of Industrial Organization 1994 9 245-272.
11. The policy options to achieve universal service could include: (1) low prices to all; or (2) targeted subsidies to 'deserving' groups. Each policy alternative has a different price tag, and each has different consequences for the industry organization. If a very low basic service price cap is applied to all residential customers, funds will be required from other customers and from residential customers who purchase other telecommunications services. Such indirect 'taxes' will keep intrastate inter-LATA rates up and will slow the introduction of new services. In addition, entry (which takes the form of bypass) will be artificially encouraged unless some form of comprehensive surtax can be put into place. Targeted subsidies and a higher basic service price cap allow the achievement of the universal service objective without introducing incentives for inefficient behavior.
12. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
13. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
14. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
15. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
16. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
17. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
18. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
19. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
20. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
21. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
22. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
23. Greenstein, S, McMaster, S and Spiller, P 'The effect of incentive regulation on local exchange companies' deployment of digital infrastructure' University of Illinois mimeo (1994) (subsequently published in Journal of Economic and Management Strategy 1995 4 187-236); Montgomery, W P 'Promises versus reality: telecommunications infrastructure, LEC investment and regulatory reforms' Working Paper (1994); Donald, S and Sappington, D E M 'Explaining the choice among regulatory plans in the U.S. telecommunications industry' University of Florida mimeo (1994); Taylor, W E, Zarkadas, C J and Zona, J D 'Incentive regulation and the diffusion of new technology in telecommunications' New York, NERA study (1994); Kaserman D L, Mayo, J W and Flynn J E 'Cross-subsidization in telecommunications: beyond the universal service fairy tale' Journal of Regulatory Economics 1990 2 (3) 231-249; Kaestner, R and Kahn, B 'The impact of intraLATA competition on local exchange company prices' in Crew, M A (ed.) Economic Innovations in Public Utility Regulation Kluwer, Boston (1992) 37-55; Kaserman, D L, Mayo, J W and Pacey, P L 'The political economy of deregulation: the case of intrastate long distance' Journal of Regulatory Economics 1993 5 (1) 49-63; Mathios, A D and Rogers, R P 'The impact of alternative forms of state regulation of AT&T on directdial, long-distance telephone rates' Rand Journal of Economics 1989 20 (3) 437-453; Foreman, R D 'IntraLATA toll rates: tests of a positive model of regulation' Working Paper, Gainesville, FL; Public Utility Research Center (1994); Mathios, A D and Rogers, R P The impact and politics of entry regulation on intrastate telephone rates' Journal of Regulatory Economics 1990 2 (2) 53-68; Teske, P 'Interests and institutions in state regulation' American Journal of Political Science 1991 35 (1) 139-154; and Teske P 'Rent-seeking in the deregulatory environment: state telecommunications' Public Choice 1991 68 (1) 235-243.
24. Caudill et al formally test specifications of seven alternative models and conclude that the economic theory of regulation consistently outperforms alternative theories and 'rules of thumb' for explaining regulatory behavior. See Caudill, S B, Im, B-G and Kaserman, D L 'Modeling regulatory behavior: the economics theory of regulation versus alternative theories and simple rules of thumb' Journal of Regulatory Economics 1993 5 (3) 251-262; Im, B-G, Kaserman, D L and Melese, F 'Endogenous regulation and the firm's regulatory expenditures' Applied Economics 1989 21 (3) 375-385.
25. Caudill et al formally test specifications of seven alternative models and conclude that the economic theory of regulation consistently outperforms alternative theories and 'rules of thumb' for explaining regulatory behavior. See Caudill, S B, Im, B-G and Kaserman, D L 'Modeling regulatory behavior: the economics theory of regulation versus alternative theories and simple rules of thumb' Journal of Regulatory Economics 1993 5 (3) 251-262; Im, B-G, Kaserman, D L and Melese, F 'Endogenous regulation and the firm's regulatory expenditures' Applied Economics 1989 21 (3) 375-385.
26. Nowell and Tschirhart present conditions necessary to distinguish between competing theories of regulatory behavior (Nowell, C and Tschirhart, J 'Testing competing theories of regulatory behavior' Review of Industrial Organization 1993 8(6) 653-668).
27. Multiple policy objectives have complicated the implementation of incentive regulation. Productivity advance has resulted from innovations in computers and fiber optics, and spectrum-compression has created new commercial opportunities as well. New service introductions represent a significant source of benefits to consumers. Other objectives have often been viewed as being negatively affected by competition in telecommunications. There is concern that the universal service objective will suffer as current funding mechanisms dry up. Income distributional concerns are also raised by rate averaging - where low income rural customers are hurt by price increases (even if they continue to subscribe to telephone service). Similarly, network reliability (and other dimensions of quality) are viewed as threatened by competitive pressures. Another performance objective, job security, has certainly suffered, as LECs have downsized. However, entrants have expanded their employment. In addition, the debate over implications for international balance has raised issues about imports of foreign equipment and US foreign direct investment abroad.
28. See, for example, Berg, S V and Foreman, R D 'Price cap policies in the transition from monopoly to competitive markets' Industrial and Corporate Change 1995 4 (4) 671-681.
29. Berg, S V and Tschirhart, J 'A market test for natural monopoly in local exchange' Journal of Regulatory Economics 1995 8 103-124.
30. An anonymous reviewer put the point quite forcefully: "We know that by having a [regulatory] process in place, those who have axes to grind, or who may not be selected by the market evolutionary process, will have a forum that can be used to prevent the evolution from happening. Every law and every regulation will be colonized by a constituency and [its affiliated] bureaucracy dedicated to continuing it." We propose that the burden of proof be placed on those who propose to interfere with market outcomes. This approach will not solve the problem of rent-seeking, but it increases the likelihood that the marketplace will be allowed to operate in a relatively unfettered way.