Designing Incentive Regulation for the Telecommunications Industry.DavidE. M. Sappington and Dennis L. Weisman.

Designing Incentive Regulation for the Telecommunications Industry.DavidE. M. Sappington and... 278 BOOK REVIEW and allows the Regional Bell Operating Companies (RBOCs) to enter the long distance market, firms seem more intent on merging and reselling services rather than building networks from scratch. After this background information on the industry, the next seven chapters focus on incentive regulation. Chapter 3 reviews existing regulatory plans. The more traditional plans include rate-of-return regulation, banded rate-of-return regulation with a range of authorized earnings, and rate case moratoriums. Incentive regu- lation plans consist of earnings-sharing, revenue-sharing, and price caps. When revenues are shared instead of earnings, a dollar reduction in costs would increase the firm’s actual final earnings by a dollar, rather than by some fraction. Thus, revenue-sharing plans can provide enhanced incentives to reduce costs. By control- ling prices along with a productivity offset, price cap plans also allow the firm to capture dollar for dollar any cost reduction. Periodic (rate-of-return style) reviews of price caps can reduce these incentives as productivity offsets are raised when earnings are deemed too high. The next chapter identifies regulatory goals in the telecommunications indus- try and points out that incentive regulation plans need to vary with desired goals (myth 1). Possibly conflicting goals such as universal http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Designing Incentive Regulation for the Telecommunications Industry.DavidE. M. Sappington and Dennis L. Weisman.

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1999 by Kluwer Academic Publishers
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1023/A:1007713213852
Publisher site
See Article on Publisher Site

Abstract

278 BOOK REVIEW and allows the Regional Bell Operating Companies (RBOCs) to enter the long distance market, firms seem more intent on merging and reselling services rather than building networks from scratch. After this background information on the industry, the next seven chapters focus on incentive regulation. Chapter 3 reviews existing regulatory plans. The more traditional plans include rate-of-return regulation, banded rate-of-return regulation with a range of authorized earnings, and rate case moratoriums. Incentive regu- lation plans consist of earnings-sharing, revenue-sharing, and price caps. When revenues are shared instead of earnings, a dollar reduction in costs would increase the firm’s actual final earnings by a dollar, rather than by some fraction. Thus, revenue-sharing plans can provide enhanced incentives to reduce costs. By control- ling prices along with a productivity offset, price cap plans also allow the firm to capture dollar for dollar any cost reduction. Periodic (rate-of-return style) reviews of price caps can reduce these incentives as productivity offsets are raised when earnings are deemed too high. The next chapter identifies regulatory goals in the telecommunications indus- try and points out that incentive regulation plans need to vary with desired goals (myth 1). Possibly conflicting goals such as universal

Journal

Review of Industrial OrganizationSpringer Journals

Published: Oct 15, 2004

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