Review of Industrial Organization 15: 341–356, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
Another Look at Local Franchise Regulation and
State Commission Regulation: Do They Really
Public Utilities Commission of Nevada, Carson City, NV 89705, U.S.A.
Abstract. While economic theories suggest that ﬁrm behavior may diverge over time under local
franchise regulation and state commission regulation, empirical studies on that issue are scant. By
exploiting the facts that: both types of regulation coexisted in the cable television industry prior to
federal deregulation; and the starting years of cable systems varied widely, this paper approaches the
issue. Two empirically testable hypotheses are set. First, market power exercised varies with system
ages. Second, the age-dependent path of the market power exercised differs under local franchise
regulation and state commission regulation. The paper ﬁnds evidence supporting these hypotheses.
Though some qualiﬁcations are required due to the use of cross-sectional instead of panel data, the
evidence presented here is highly suggestive that regulator-ﬁrm relations have played a role and
might be a cause of the differing monopoly powers exercised.
Key words: Local franchise regulation, ﬁrm-regulator relationship, market power.
The Telecommunications Act of 1996 lifted rate regulation for small cable sys-
tems and “sunsets” rate regulation for most systems on March 31, 1999. However,
competition has been slow to come, and rates have been soaring once again.
the sunset date approaches, cities and other franchising authorities almost certainly
will press for extended and greater rate regulation power. A recently introduced bill
proposes to grant local franchisers the authority to extend rate regulation.
this revived interest in the role of local franchisers, this paper revisits the efﬁcacy
of local franchise regulation in cable television regulation. It will do so, however,
in a different perspective, on a basis of regulator-ﬁrm relationship. Speciﬁcally,
the paper examines how cable systems behaved over time under local franchise
I would like to thank Dan Berry and two anonymous referees for helpful comments and sug-
gestions. The opinions expressed here are my own and do not necessarily reﬂect those of the Public
Utilities Commission of Nevada.
A recent FCC survey shows that regulated systems boosted rates 8.5 percent in 1997 and that
rates among unregulated systems surged by 9.6 percent over the same period (FCC 97-409).
See, for instance, H.R. 4352 that was introduced by Reps. Tauzin (R-La) and Markey (D-Mass).