John W. Mayo

The Measurement of Vertical Economies and the Efficient Structure of the Electric Utility Industry

In this article, the concept of multiproduct cost economies is modified to the case of production at vertically related stages to derive an explicit and general measure of economies of vertical integration. The utility of this measure is then demonstrated by estimating the vertical cost structure of the electric utility industry and by carrying out the calculations necessary to determine the magnitude of vertical economies in this industry. The results provide empirical evidence of the existence of significant economies of vertical integration between the generation and transmission/distribution stages of electricity supply. Copyright 1991 by Blackwell Publishing Ltd.

Demand, Pricing, and Regulation: Evidence from the Cable TV Industry

Subsequent to the nationwide deregulation of the cable TV industry, a number of questions have been raised concerning the conduct of cable firms. Answers to these questions turn upon a fundamental set of issues regarding the economic relationships of demand, pricing, and regulation. In this article, we empirically examine these relationships for the period prior to deregulation. A number of basic findings emerge. Among these, we find that the demand for basic cable service ranges from being generally inelastic in rural areas to elastic in large urban markets. The elasticity of demand for pay cable services is typically well in excess of unity. Also, while regulation did not lead to economically efficient (marginal cost) prices for basic cable service, it did act to keep prices below monopoly levels. Moreover, our examination reveals some significant differences in the effectiveness of the various types of regulation practiced in the pre-deregulation period.

Targeted and Untargeted Subsidy Schemes: Evidence from Postdivestiture Efforts to Promote Universal Telephone Service

Normative economic analysis traditionally has pointed toward the merits of policies wherein prices reflect the economic cost of providing a good or service. Subsidization policies are, nevertheless, common in a variety of industries. Where such subsidies occur, economists have long advocated targeting those subsidy flows to maximize their effectiveness and minimizing the allocative inefficiency caused by financing of the subsidy. Despite the apparent consensus in economic thought on this subject, empirical evidence of the relative effectiveness of targeted versus untargeted subsidies to date has been lacking. In this article, we address this lacuna by examining a set of large‐scale targeted and untargeted subsidy flows that have developed side by side, each with the same nominal policy goal—promoting universal telephone service. Specifically, we test empirically the relative contributions of the alternative subsidy mechanisms in promoting the policy goal of maximizing subscription to the public switched telephone network. Our analysis indicates that targeted subsidy programs are considerably more effective than untargeted subsidies in promoting the goal of universal telephone service. Moreover, our results indicate that the financing mechanism used to generate subsidy flows may seriously erode the effectiveness of either targeted or untargeted subsidy policies.

Cross-Subsidization in Telecommunications: Beyond the Universal Service Fairy Tale

For many years, regulatory policy in the telecommunications industry has been strongly influenced by the belief that the traditional system of cross-subsidizing local rates by long distance has served to promote the goal of universal service. In this paper, we examine both the theoretical and empirical support for this widely accepted relationship and find it wanting in each. The results indicate that the cross-subsidization mechanism bears no causal relationship to the policy goal of universal service. Instead, both the subsidy levels and subscription rates appear to be determined by other economic variables, such as those suggested by the economic theory of regulation.

Is the "Dominant Firm" Dominant? An Empirical Analysis of AT&T's Market Power

In this article, we estimate the degree of market power held by AT&T in the interstate long-distance market in the postdivestiture period. Our approach makes use of the dominant firm/competitive fringe model to impose the structure needed both to obtain estimates of the relevant structural parameters and to translate these parameters into an estimate of AT&Ts residual demand elasticity and associated Lerner index. Because of the continued presence of regulation and other considerations, however, a direct estimation of the residual demand elasticity is not feasible. Consequently, we take a more indirect approach that combines estimation of the elasticity of fringe firm supply, market demand estimation, and extant market share data to generate estimates of the desired elasticity. The resulting estimates strongly support the conclusion that AT&T lacks significant market power in the postdivestiture long-distance market.

The political economy of deregulation: The case of intrastate long distance

Observed variation in the decisions of state regulators to deregulate AT&T in the provision of intrastate interLATA telecommunications services provides useful data with which to test the economic theory of regulation against its principal alternative—the public interest theory. An empirical model of the decision to deregulate is specified and estimated. Our results lend empirical support to the economic theory of regulation and fail to support the public interest theory. The results also help to explain the lethargic pace of deregulation of this industry.

Enabling efficient wireless communications: The role of secondary spectrum markets

Despite the potentially critical nature of secondary markets in maintaining efficient spectrum and wireless markets, research has to date has focused primarily on the Federal Communication Commissions rules for initial distribution of spectrum. To redress this lacuna, we first examine the evolution of conceptual and policy developments directed toward secondary spectrum markets. Then, we seek to move beyond those efforts to empirically document the development of secondary spectrum activity in the United States and the relationship of that development to the evolving policy toward such markets. We categorize and explore different types of secondary spectrum markets. Then, by drawing on a database of every spectrum license transaction since 1994, we explore the depth and breadth of spectrum trading in secondary markets. We find that the FCC has radically reduced the time it takes to approve trades, making the system more akin to notification than to approval. We also find that a large amount of spectrum changes hands each year. While these conclusions do not necessarily imply that secondary markets work efficiently, they do show that policy efforts to facilitate and energize the growth of secondary spectrum markets are bearing considerable fruit.

Firm size, employment risk and wages: further insights on a persistent puzzle

Recent inquiries into the observed positive relationship between wages and firm size suggest that unobservable characteristics give rise to a sorting of workers into large and small firms. Specifically, smaller firms tend to offer more unstable employment prospects and will tend to attract workers who are themselves unstable. As demonstrated by empirical analysis, the risk of permanent employment separation (i.e. the risk of firm failure) is in fact negatively correlated with firm size. Moreover, when this measure of employment risk is included as a determinant of wages, the independent influence of firm size on wages vanishes. These results suggest that firm size merely proxies for the risk of firm failure by capturing unobservable sources of heterogeneity in workers and firms.

Regulator Heterogeneity and Endogenous Efforts to Close the Information Asymmetry Gap

The now standard principal-agent model of regulator-firm interactions typically assumes the presence of a single regulator and an exogenously determined information asymmetry between the principal and the agent. In this paper we draw upon a unique data set of regulatory inspections conducted by the U.S. Food and Drug Administration (FDA) to explore the consistency of these assumptions with the actual practice of regulators. We find that the canonical assumptions of the agency paradigm are strained by, if not altogether inconsistent with, the key practical realities of regulation by the FDA. Our analysis uncovers several dimensions along which regulators actively and endogenously seek to close the information asymmetry gap. We also find considerable regulator heterogeneity, which in turn depends in part upon the specific training and experience of individual regulators.

Demand and Pricing of Telecommunications Services: Evidence and Welfare Implications

Although telephone pricing has received increasing attention in recent years, the geographic patterns of telephone pricing and the corresponding economic consequences of those patterns have remained perplexing to consumers and policymakers and largely unaddressed by economists. In this article we first specify a model of the demand for short (intraLATA) long distance calling. We then draw upon data made available by the recent adoption of extended area service (EAS) in four metropolitan areas to empirically measure the structure of inter-exchange telephone demand. Given these estimates, and a conceptual framework for analyzing the economic welfare effects, we were able to quantify the consumer-surplus effects of alternative pricing policies. The empirical results indicate that consumer surplus is noticeably enhanced by adopting EAS. But the net economic welfare effects are shown to be sensitive to, among other things, the level of price-cost margins prevailing prior to the implementation of EAS.