Review of Industrial Organization 14: 277–280, 1999.
Designing Incentive Regulation for the Telecommunications Industry.DavidE.
M. Sappington and Dennis L. Weisman. Cambridge, MA: The MIT Press and
Washington, DC: The AEI Press, 1996, xvi + 388 pp., $35.00 (cloth).
Economic regulation of traditional industries seems destined to disappear entirely,
as with airlines, or to change dramatically as regulators experiment with alterna-
tives to rate-of-return regulation. Although a process covering about two decades
now, recent changes have come so quickly that it may be difﬁcult for the casual
observer to keep track of it all. Perhaps the most exciting and visible industries
currently undergoing transformations are electric utilities and telecommunications.
As part of the American Enterprise Institute’s Telecommunications Deregulation
Project, this book by Sappington and Weisman provides an insightful, accessi-
ble analysis of today’s telecommunications industry. On the other hand, it is not
for readers looking for a synthesis of recent, more theoretical work on incentive
To focus the discussion, they present ten common “myths” about incentive reg-
ulation. These myths relate to factors such as performance measures, ﬁrm ﬁnancial
rewards, compensation structure choices, gains to ﬁrms and consumers, degree of
competition, and asymmetries in regulation. In the middle chapters of the book,
they discuss the principles underlying incentive regulation and the early empiri-
cal evidence. Then in the conclusion, they revisit these myths and restate them
correctly, as well as provide policy recommendations.
Following the introduction, Sappington and Weisman begin with a look back at
the history and a look forward at the likely future of the industry. Even for those
familiar with the telecommunications industry, this chapter is worth reading for
its useful summary of many facts. For those with less familiarity, it presents an
overview of the industry’s technologies, structure, pricing, and emerging competi-
tion. In their emphasis on the bypass threat, Sappington and Weisman suggest in
their initial discussion of incentive regulation, that price caps may increase com-
petition and bypass by allowing interexchange carriers (IXCs) to keep any savings
from lower access charges. The authors’ best guess of the future of competition
in the industry does seem overly optimistic in hindsight. Since the enactment of
the Telecommunications Act of 1996, which tries to open local phone markets