Sage Journals: Discover world-class research

Abstract

This paper derives optimal price structure regulation schemes for partially regulated multi-market utilities, in a context of both complete and asymmetric information. The effects of these regulation schemes on competition and market structure in unregulated segments are explored under oligopoly competition. It is shown that, although Fully Distributed Cost (FDC) can be a good instrument in a partial regulation context with full information, it offers under asymmetric information an opportunity for the multi-market incumbent to engage in strategic accounting manipulation. Multi-market incumbents tend to misreport true marginal costs: costs are inflated in the regulated segment, and competition is harmed in the unregulated segment. The Incremental Cost rule is thus compared to FDC in terms of overall welfare effects, based on the characteristics of this incentive behavior. Accounting manipulation is also studied within antitrust issues, where the anticompetitive effects of possible regulatory failure are highlighted.

Keywords

regulation cost allocation accounting asymmetric information antitrust policy multi-market utilities

Get full access to this article

View all access options for this article.

References

Armstrong

and Sappington

(2002) “Recent developments in the theory of Regulation”, forthcoming in the Handbook of Industrial Organization, vol. III.

Baratta

Buigues

Fehrenbach

Johansson

and Luder

(2001) “The application of EC competition rules in the postal sector”, paper presented at the “Second Conference on Competition and Universal Service in the Postal Sector”, Toulouse IDEI, 6–7 December.

Baumol

W. J.

and Sidak

J. G.

(1994) Toward Competition in Local Telephony. MIT Press, Cambridge, MA.

Biggar

(2001) “When should regulated companies be vertically separated?”, in Amato

and Laudati

L. L.

(eds), The Anticompetitive Impact of Regulation. Edward Elgar.

Braeutigam

R.R.

(1980), “An analysis of Fully Distributed Cost pricing in regulated industries”, Bell Journal of Economics 11(1): 182–196.

Braeutigam

and Panzar

J. C.

(1989) “Diversification incentives under “Price-Based” and “Cost-Based” Regulation”, RAND Journal of Economics, 20 (3).

Brennan

T.J.

(1990) “Cross-subsidization and cost misallocation by regulated monopolists”, Journal of Regulatory Economics, 2, 37–51.

Chaaban

(2004) “Partial Regulation and Cost Allocation in Multimarket Utilities”, Economics Working Paper Archive (Toulouse) 2004–03, French Institute for Agronomy Research (INRA), Economics Laboratory in Toulouse (ESR Toulouse).

Chang

Y.M.

and Warren

(1997) “Allocative efficiency and diversification under price-cap regulation”, Information Economics and Policy, 9: 3–17.

10.

Commonwealth Competitive Neutrality Complaints Office (1998) “Cost Allocation and Pricing”, CCNCO Research Paper, Productivity Commission, Canberra, October. European Commission Decision, 20 March 2001, Case 2001/354/EC Deutsche Post AG, Official Journal of the European Communities.

11.

Foreman

R.D.

(1995) “Pricing incentives under price-cap regulation”, Information Economics and Policy, 7: 331–351.

12.

Gasmi

Kennet

D. M.

Laffont

J. J.

and Sharkey

W. W.

(2002) Cost Proxy Models and Telecommunications Policy – A New Empirical Approach to Regulation. MA: MIT Press.

13.

Laffont

J.J.

(1994) “The new economics of regulation ten years after”, Econometrica, 62(3): 507–537.

14.

Laffont

J.J.

and Martimort

(2002) The Theory of Incentives: The Principal-Agent Model. Princeton University Press, Princeton, NJ.

15.

Laffont

J.J.

and Tirole

(1986) “Using cost observation to regulate firms”, Journal of Political Economy, 94: 614–641.

16.

Laffont

J.J.

and Tirole

(1990) “The regulation of multiproduct firms I: Theory”, Journal of Public Economics, 43: 1–36.

17.

Laffont

J.J.

and Tirole

(2000) Competition in Telecommunications. MA: MIT Press.

18.

Ordover

and Saloner

(1989) “Predation, monopolization and antitrust”, in Schmalensee

and Willig

(eds), Handbook of Industrial Organization. Amsterdam, North-Holland.

19.

Sappington

D.M.

and Sidak

(2003) “Incentives for anticompetitive behavior by public enterprises”, Review of Industrial Organization, forthcoming.

20.

Spulber

(1989) Regulation and Markets. MA: MIT Press.

21.

Sutton

(1991) Sunk Costs and Market Structure. MA: MIT Press.

22.

Vickers

(1998) “Regulation, competition and the structure of prices”, in Helm

and Jenkinson

(eds.), Competition in Regulated Industries. Oxford University Press.

23.

Vogelsang

(2002) “Optimal price regulation for natural and legal monopolies”, mimeo, Boston University.

24.

Weisman

D.L.

(1993) “Superior regulatory regimes in theory and practice”, Journal of Regulatory Economics, 5: 355–366.

25.

Zimmermann

(2000) Accounting for Decision Making and Control. 3rd edition, McGraw Hill.

Using Cost Allocation to Partially Regulate Multi-Market Utilities

Abstract

Keywords

Get full access to this article

References