Dennis L. Weisman

The effects of incentive regulation in the telecommunications industry: A survey

We review recent empirical studies of the performance of incentive regulation in the telecommunications industry. These studies provide evidence that productivity, infrastructure investment, profit levels, telephone penetration, and new service offerings have increased under incentive regulation. Service rates have generally remained stable or decreased slightly, and service quality does not appear to have been affected adversely. There is no evidence that incentive regulation has led to streamlined regulatory proceedings. Strong evidence that incentive regulation has reduced the costs of providing telephone service has not yet materialized.

Regulation and the Vertically Integrated Firm: The Case of RBOC Entry into Interlata Long Distance

Congress is considering telecommunications reform legislation that would allow the Regional Bell Operating Companies (RBOCs) to enter the interLATA long-distance market. A concern is that a vertically-integrated RBOC would be able to discriminate against its rivals. A proposed remedy would require the RBOCs to reduce their access market share as a precondition to interLATA entry. We show formally that such a precondition likely contributes to higher long-distance prices and enhances the risk of discrimination. Furthermore, the lower the share of access profits retained by an RBOC, the weaker are its incentives to lower long-distance prices.

The Telecommunications Act at three years: an economic evaluation of its implementation by the Federal Communications Commission

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Option value, telecommunications demand, and policy

Abstract Demand estimation and welfare analysis for telecommunications services have often been plagued by apparent inconsistencies between actual consumer behavior and standard economic theory. The latter posits that consumers will subscribe to services when their consumers surplus exceeds the subscription price. This paper presents an alternative model of subscription behavior under uncertainty. Drawing on the option value literature, we show that expected consumers surplus is generally not an adequate basis for subscription decisions. We present an empirical example in which option value significantly improves demand estimation. We discuss policy implications, including possible ‘market failures’ in which socially beneficial new technology is not deployed.

Price regulation and quality

Abstract A growing concern on the part of regulators in the telecommunications and electric power industries is that the adoption of price-cap regulation may weaken incentives for investment in service quality. This analysis reveals that participation by the regulated firm in complementary, competitive markets may serve to temper this incentive. Paradoxically, commonly used revenue-share penalties can (actually) serve to reduce investment in quality. In contrast, profit-share penalties and increased information dissemination regarding the regulated firms compliance with quality benchmarks provide unambiguous incentives for increased investment in quality, ceteris paribus .

Superior regulatory regimes in theory and practice

A substantial body of recent research finds thatprice-cap regulation is superior tocost-based regulation in that many of the distortions associated with the latter are reduced or eliminated entirely. We prove that the hybrid application ofcost-based and price-cap regulation that characterizes current regulatory practice in the United States telecommunications industry may generate qualitative distortions greater in magnitude than those realized undercost-based regulation. It follows thatprice-based regulation in practice may be welfare-inferior tocost-based regulation. The analysis further reveals that the firm subject to this modified form ofprice-based regulation may have incentives to engage in pure waste.

Incentives for Discrimination when Upstream Monopolists Participate in Downstream Markets

A regulated upstream monopolist supplies an essential input to firms in a downstream market. If an upstream monopolist vertically integrates downstream, non-price discrimination becomes a concern. Discrimination always arises in equilibrium when the vertically integrated provider (VIP) is no less efficient than its rivals in the downstream market, but it does not always arise when the VIP is less efficient than its rivals. Numerical simulations that parameterize the regulators ability to monitor discrimination in the case of long-distance telephone service in the U.S. reveal that pronounced efficiency differentials are required for the incentive to discriminate not to arise in equilibrium.

The Telecommunications Act of 1996 : the "costs" of managed competition

Acknowledgements. 1. Introduction and Overview. 2. Industry Trends and Market Structure. 3. The Stock Market Reacts. 4. A Jurisdictional Model. 5. The FCCs Efficient - Firm Standard - Telric. 6. Back to the Future. 7. Explaining State Regulatory Actions. 8. Conclusions. References. Name Index. Subject Index.

Revenue sharing in incentive regulation plans

Abstract We examine the merits of revenue sharing in incentive regulation plans. We demonstrate how revenue sharing can be employed to construct an incentive plan that ensures strict gains for both consumers and the regulated firm relative to a pure profit-sharing plan. Revenue sharing is also shown to diminish incentives for wasteful expenditures and price discrimination by the regulated firm, and to limit regulatory expropriation of the firm.

The Incentive to Discriminate by a Vertically-Integrated Regulated Firm: A Reply

In Weisman (1995), I construct a model to investigate the incentives of a vertically-integrated regulated firm to discriminate against downstream rivals. This model suggests that the RBOCs do not have the same incentives to discriminate as AT&T prior to divestiture. Reiffen (1998) questions this and other conclusions. This reply addresses his claims.