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
Review of Industrial Organization – Springer Journals
Published: Oct 15, 2004
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