When can regulation defer to competition for constraining market power?: Complements and critical elasticities

Journal of Competition Law and Economics

Volumn 2, Issue 1, 2006, Pages 101-112

  Weisman, Dennis L ^a  

^a KANSAS STATE UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33645578475     PISSN: 17446414     EISSN: 17446422     Source Type: Journal    
DOI: 10.1093/joclec/nhl005     Document Type: Article

References (28)

1. Alfred E. Kahn, The Economics of Regulation: Principles and Institutions (New York: John Wiley and Sons, 1970) Volume 1, 17.
2. Indeed, as Professor David Sappington observes: "It is generally preferable to replace regulatory control with the discipline of competition when competition provides adequate protection for consumers. In practice, though, it is often difficult to determine precisely when adequate, sustainable competitive pressures have developed." David E. M. Sappington, 'Price regulation' in M. Cave, S. Majumdar and I. Vogelsang, (eds), Handbook of Telecommunications Economics (Amsterdam: North-Holland, Chapter 7, 2002) 265 note 58.
3. Even when an industry exhibits characteristics of natural monopoly, intermodal competition may render regulation unnecessary because such competition from firms using different technological platforms (or entering from different industries, such as cable into telephony) may impose the requisite level of pricing discipline. See Ronald R. Braeutigam, 'Optimal policies for natural monopolies,' in R. Schmalensee and R.D. Willig (eds), Handbook of Industrial Organization (Amsterdam: North-Holland, 1989) Volume II, Chapter 23, 1289-1346.
4. There may be a tendency to conclude that these high price-cost margins are themselves indicative of market power as they may not be sustainable otherwise. Yet, it would seem difficult to argue that a regulated firm operating with high price-cost margins but nonetheless subject to a de facto zero profit constraint, at least in the aggregate across the industry, is necessarily exercising market power. There is general recognition in the economics of regulation literature that the model of atomistic or perfect competition is not the appropriate benchmark for emulation by the regulatory authority because such competition does not reflect the operating characteristics of a business enterprise with large-scale capital investments - such as telecommunications. It follows that prices in excess of marginal or incremental cost in such industries need not be indicative of market power.
5. See Jerry A. Hausman and J. Gregory Sidak, 'A consumer-welfare approach to mandatory unbundling of telecommunications networks,' 109 Yale Law Journal (1999) at 477-79;
6. Jerry A. Hausman, 'From 2G to 3G: Wireless competition for internet-related services,' In Broadband: Should We Regulate High-Speed Internet Access?, R. W. Crandall and J. H. Alleman (eds) (Washington, DC: AEI-Brookings Joint Center for Regulatory Studies, 2002) 106-28;
7. and Jerry A. Hausman, 'Regulated costs and prices in telecommunications,' in G. Madden (ed.), International Handbook of Telecommunications Economics: Emerging Telecommunications Networks (Cheltenham: Edward Elgar, 2003) Volume 2, 199-233.
8. For a comprehensive discussion of this issue in the broader context of antitrust, see Jerry A. Hausman, Gregory K. Leonard and Christopher A. Vellturo, 'Market definition under price discrimination,' 64(2) Antitrust Law Journal 367 (1996).
9. The high proportion of sunk costs for the regulated firm suggests that avoidable cost is the relevant measure of marginal cost for this analysis.
10. In the case of a single-product firm, this idea is similar to Professor Clark's unitary "margin elasticity." John M. Clark, Competition as a Dynamic Process (Washington, DC: Brookings Institution, 1961) 148-50.
11. Incumbent providers of local telephone service have recently acquired long distance and wireless providers, thereby increasing concentration in these markets. For example, in the wireless market, Cingular, a joint venture between SBC and BellSouth, recently acquired AT&T wireless and Sprint recently acquired Nextel. In the long-distance market, SBC has consummated its acquisition of AT&T and Verizon has consummated its acquisition of MCI. Verizon and SBC (now "at&t") are the two largest telephone companies in the U.S. Notably, whether wireless is a substitute or a complement for wireline telephone service is an ongoing debate in regulatory proceedings.
12. As discussed in Section V, new technologies are rapidly reducing the cost of provisioning basic local telephone serviced. Hence, at least in those markets in which regulation has set prices in the neighborhood of current costs, this would not appear to be a significant limitation on the use of this approach in practice.
13. The 5% value is generally considered the benchmark for the "small but significant and nontransitory" increase in price called for in the Department of Justice and the Federal Trade Commission. Horizontal Merger Guidelines, 1992 [inclusive of 8 April 1997 Revisions] at §1.0.
14. For a discussion of the limitations of inferring market power from market share, particularly for regulated firms, see William W. Landes and Richard A. Posner, 'Market power in antitrust cases,' 94(5) Harvard Law Review 937 (1981).
15. Federal Communications Commission, Local Telephone Competition: Status as of 31 December 2004. Industry Analysis and Technology Division, Wireline Competition Bureau (July 2005).
16. * since these services have positive price-cost margins and are substitutes for wireline service. See Table 3.
17. i are relatively low and competitive alternatives may be limited.
18. ii* will decrease, ceteris paribus.
19. See, for example, Robert W. Crandall and Leonard Waverman. Who Pays for Universal Service? (Washington, DC: Brookings Institution, 2000).
20. Quote attributed to Mr Powell by Telecommunications Reports, 5 March 2001 at 10.
21. Indeed, as recently reported, "vertically-integrated broadband access providers will increasingly include VoIP services 'for free' with the sale of other services, as Cablevision has already done." Jonathan E. Neuchterlein and Philip J. Weiser, Digital Crossroads, American Telecommunications Policy in the Internet Age (Cambridge, MA: The MIT Press, 2005) 193. A recent article discusses the packages of services that Cablevision sells and notes that "Cablevision is effectively giving away phone service."
22. Ken Brown, "Cablevision to offer Internet phone-call bundle," The Wall Street Journal (21 June 2004), at B5.
23. Indeed, a recent article highlights the nature of the metamorphosis now underway in telecommunications markets.: It is now no longer a question of whether VOIP will wipe out traditional telephony, but a question of how quickly it will do so. People in the industry are already talking about the day, perhaps only five years away, when telephony will be a free service offered as part of a bundle of services as an incentive to buy other things such as broadband access or pay-TV services. VOIP, in short, is completely reshaping the telecoms landscape. "How the Internet killed the phone business," The Economis t (17 September 2005), at 11.
24. Supra note 10.
25. For example, in a recent forbearance proceeding in Canada, the Competition Bureau stated that: Similarly, in assessing forbearance, the Bureau is of the preliminary view that the base price that should be used to postulate a price increase is the prevailing regulated price. The forbearance analysis seeks to assess the likelihood that price will increase, above the prevailing regulated level, if regulatory constraints are removed. Cana dian Radio-Television and Telecommunications Commission (CRTC), Telecom Public Notice CRTC 2005-2, Forbearance from Regulation of Telecommunications Services, Evidence of The Commissioner of Competition (22 June 2005), at ¶166.
26. See Neuchterlein and Weiser, supra note 18, at chapter 6.
27. In certain cases, it may not be necessary to estimate firm-specific elasticities and compare them with critical elasticities in order to determine whether the incumbent provider would have incentives to raise prices post-deregulation. For example, in a recent regulatory proceeding in Canada to establish a "bright-line" test for forbearance, the Competition Bureau took the position that "the following set of conditions may be sufficient" for forbearance from regulation: (i) Consumers have access to two independent facilities-based service providers offering similar services, functionalities and quality of access; (ii) The variable costs of the two service providers are similar, or the variable costs of the entrant are lower, and neither competitor is capacity constrained; (iii) There is evidence of rivalry between these firms, and the entrant is able to retain its customer base; and (iv) Industry characteristics are such that ILECs are unlikely to engage in anti-competitive activity. Canadian Radio-Television and Telecommunications Commission (CRTC), Telecom Public Notice CRTC 2005-2, Forbearance from Regulation of Telecommunications Services, Argument of The Commissioner of Competition (15 September 2005), at ¶29.
28. For a discussion of the use of price elasticities in regulatory hearings, see Lester D. Taylor, Telecommunications Demand In Theory and Practice (Boston, MA: Kluwer, 1994) Chapter 10.