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1423class8 - 14.23 Government Regulation of Industry Class...

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Unformatted text preview: 14.23 Government Regulation of Industry Class 8: Franchise Bidding and CATV MIT & University of Cambridge 1 Outline Why regulate utilities? Franchising benefits Contractual problems CATV (community-antenna television) Regulation, de-regulation, re-regulation Other examples of franchising 2 Why regulate utilities? Harold Demsetz asks this question in 1968 (borrowing on ideas from Edwin Chadwick in 1859). Why cant there be competition for the field even though only one firm actually produces the good or service? Classic example is in defence industry where only one design of tank or plane is adopted. Does that mean Dept. of Defence pays monopoly prices? The solution is to have a modified English Auction where the monopoly franchise is awarded to the lowest cost bidder. 3 Process with linear prices Auctioneer announces price at which monopoly service will be offered. Determine how many active bidders are around at that price. If number is >1, announce a lower price. Keep going until only 1 bidder is left and the last price is the price at which the service will be offered to the public. 4 What actually happens? P There are three bidders with AC 1 AC 2 AC 3 average cost curves as shown. Assuming they do not collude what will be the price paid by the public? Is it socially optimal? D Q 5 Consequences of Bidding Process Positives: Least cost firm wins. No problem of over-capitalisation. No informational requirements on regulator. Franchise owner has incentive to cost efficient. Negatives: Price is above least cost, competition is lacking. As contract is written on price may skimp on quality. Two-part tariff is more efficient. 6 Two Part Tariff P Government knows demand curve, 7 MC AC D but not cost curve. Auctions off right to monopoly by giving it to the bidder that maximises social welfare. What is gain in social welfare over linear tariff? 0 Q Q 1 Q Additional Complications Quality Not a problem if is this is homogeneous, however it rarely is. This is a problem if cost and quality are negatively related. Government will need to specify and enforce quality standards. Rent seeking behaviour Multi-dimensional bidding means that it is difficult for auctioneer to work out best bid (e.g. with spectrum actions)....
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1423class8 - 14.23 Government Regulation of Industry Class...

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