David S. Sibley

Efficiency and Competition in the Airline Industry

After reviewing some recent developments in the airline industry, this article tests two hypotheses that were central to the argument for deregulation: (1) that CAB regulation caused airlines to employ excess capacity relative to the capacity that would be provided under unregulated competition; and (2) that potential competition would keep fares at cost even in highly concentrated markets. An econometric analysis of these hypotheses based on postderegulation data suggests that the excess capacity hypothesis is essentially confirmed. In contrast, the pattern of fares in late 1980 and early 1981 does not support the potential competition hypothesis that fares are independent of market concentration.

Optimal Nonuniform Prices

We consider optimal nonuniform pricing schedules, where the price depends upon the amount purchased. Such schedules are regularly used by public utilities and other services. Welfare-optimal nonuniform prices are related to the theory of optimal uniform prices developed by Ramsey. We characterize situations in which upward or downward discontinuities in pricing schedules are optimal. Our results are applicable to a number of related problems, including optimal taxation, insurance, and incentives.

Regulating without Cost Information: The Incremental Surplus Subsidy Scheme

The authors propose a regulatory mechanism, called the incremental surplus subsidy (ISS) scheme, that can be implemented even when the regulato r has no knowledge of the monopolists cost structure. The regulator need only share the firms knowledge of demand (which may be imperfec t) and be able to observe (with a lag) the firms expenditures. The I SS scheme induces the firm to set marginal cost prices, to minimize p roduction costs, and to undertake efficient investment levels. It als o severely limits the firms rents, and eliminates them altogether if the firms discount rate is known. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Asymmetric Information, Incentives and Price-Cap Regulation

A regulatory incentive mechanism is presented in which the regulated firm has superior information about both cost and demand, compared to the regulator. The mechanism leads to truthful revelation of the demand function and extracts all rents due to private demand information in a nondistorting way. The scheme assumes that the regulator can observe lagged expenditures by the firm. This mechanism leads to efficient pricing, operating, and investment behavior by the firm. Finally, it is shown that the mechanism is closely related to recent proposals for price-cap regulation and that under certain assumptions simple modifications of these proposals will lead to the mechanisms discussed herein.

Ex post vs. ex ante pricing: Optional calling plans and tapered tariffs

We study optimal nonuniform pricing in a setting where a customers demand at the start of a billing period contains a random variable whose realization becomes known by the end of the billing period. In this context, an optional calling plan is a tariff which the consumer must select based on his/her expectations about the random variable, whereas, under a tapered tariff, the consumers choice of usage charge is made after he/she knows the realization of the random variable. We show that for low to moderate levels of uncertainty about the random variable entering the demand function, the optional calling plan approach to nonuniform pricing yields higher expected profit than does the tapered tariff approach, given risk-neutral consumers. We illustrate this finding with a case study and argue that it is consistent with the historical evolution of tariffs in the interexchange telecommunications market.

Multiproduct Nonlinear Pricing with Multiple Taste Characteristics

We analyze optimal multiproduct nonlinear prices in the case where consumer tastes are characterized by more than one taste parameter. We present conditions under which the optimal nonlinear price schedule can be computed by finding optimal price schedules separately for each market. If so, they are unbundled; if not, they are bundled. Bundling is weakly superior to unbundling and is strictly superior when a condition that we term uniform ordering of demand curves is weakly violated. With uniform ordering of demand curves, multiproduct nonlinear prices have the same features as single-product ones. Without this condition it is easy to construct examples that contradict some well-known results from the standard literature in mechanism design.

Optimal non-linear pricing with regulatory preference over customer type

Abstract In this paper we characterize the Pareto-optimal set of non-linear pricing schedules when non-negative weights are assigned to each customer type. Our analysis first compares general non-linear tariff schedules and sets of self-selecting two-part tariffs, when there are two customer types and the cost function is linear. We then derive optimal sets of two-part tariffs for arbitrary numbers of customer types and general cost functions. We also consider the sustainability of non-linear pricing schedules under the threat of entry of rival firms.

The competitive incentives of vertically integrated local exchange carriers: An economic and policy analysis

The U.S. Congress passed sweeping telecommunications reform legislation in 1996 that will enable the Regional Bell Operating Companies (RBOCs) to enter the interLATA long-distance market once certain conditions are met. This legislation empowers the state public service commissions, the Federal Communications Commission and the Justice Department to determine collectively when RBOC entry into interLATA long-distance markets satisfies the public interest. This article reveals that as long as RBOC long-distance market shares remain below certain critical levels, the RBOCs do not have the incentives (despite having the opportunity) to discriminate against their downstream competitors. These findings suggest that a public policy focused exclusively on eliminating the opportunity to discriminate may needlessly delay RBOC entry into interLATA markets and thereby deprive consumers of the benefits of enhanced competition.

OPTIMAL FOREIGN DEBT ACCUMULATION WITH EXPORT REVENUE UNCERTAINTY

BARDHAN [3] AND BADE [2] have considered optimal foreign borrowing as a variant of the Ramsey problem. In these models, savings and foreign borrowing are both ways of expanding the capital stock, and foreign-financed capital is interpreted as meaning foreign-financed physical capital, whether produced domestically or abroad. However, one also associates foreign borrowing with instability of national income, often induced by the high variability of export proceeds. Accordingly, it seems of some interest to construct a model similar to Bardhans and Bades, but to introduce export revenue uncertainty explicitly. One issue which the properties of such a model may help resolve is that of the inverse relationship of domestic saving to foreign borrowing observed empirically. Weisskopf, Rahman and Griffin and Enos [4, 8, 11, 12] have all argued that this negative association may reflect optimizing behavior on the part of developing countries, but none of them has provided an optimizing model which yields such a negative relationship. We view saving and net foreign capital inflow as endogenous variables and establish conditions under which they react in opposite directions to external shocks. We also analyze the trajectory over time of optimal foreign borrowing. Another result we derive is that foreign borrowing, given exogenous, random export revenues, is nonincreasing provided that a sufficient condition for positive investment is met. Finally, we examine the effect of changes in export revenue uncertainty on optimal savings and borrowing trajectories, as well as the response of these variables to random fluctuations in exports.

Public utility pricing under risk: A generalization

Abstract The existing literature on public utility pricing with stochastic demand has reached no consensus on the profitability of pricing and investment policies which maximize expected surplus. This note contributes a theorem which resolves the issue and contains previous results as special cases.