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1423class9 - 14.23 Government Regulation of Industry Class...

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14.23 Government Regulation ± of Industry± Class 9: Dynamic Issues in Natural Monopoly Regulation 1
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Outline When is a natural monopoly no longer a natural monopoly? • Telecom regulation in the US • Technological change and regulation • The break-up of AT&T • Regulated Competition • The Separations issue • An alternative development path? 2
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Demand Changes P P** D 0 D 1 AC 0 Q MES 3Q MES Q 3
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Reduction in Fixed Costs 4 AC 1 C(Q)=FC+VC(Q) AC(Q)=FC/Q + AVC(Q) D MC $ AC 0 0 Q
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Rise in Variable Costs P MC 0 AC 1 MC 1 D elastic D inelastic Effect depends on elasticity of demand. 0 Q 5 AC 0
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Policy Responses to effects of time on nature of market 1. Continue with price and entry regulation of all market segments. • 2. Fully deregulate all markets. 3. Partially deregulate some markets restricting the behaviour of incumbent monopolists in competitive market. Issue is complicated by vertical relations where part of the service is provided by a monopolist which is needed by firms in the competitive segments e.g. access to local phone network required by long distance providers. 6
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Asymmetric Regulation This occurs when regulation treats incumbent and entrants differently in market. Incumbent is multi-product firm with a universal service obligation. If you are recovering fixed costs disproportionately from one customer group. It may be possible for entrant to come in and sell more cheaply to this group (even though their costs are higher). For example Postal Service. This is wasteful because, cheaper to have one incumbent. Also such cross subsidy is not Ramsey 7 pricing.
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Telecommunications Example 3 basic services in the intercity telecommunications market (ITM): – Message Toll Service (MTS) or long-distance phone calls. – Wide-area telephone service (WATs) or interconnection services between networks. – Private line service (PLS) is a circuit that connects two or more points to meet specific user needs. 8
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History of Telecom • 1876: Alexander Graham Bell patents telephone. 1894: Patents expire and competitors to American Bell Telephone
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1423class9 - 14.23 Government Regulation of Industry Class...

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