Wednesday, December 03, 2003

Review of Network Economics

A new edition of the Review of Network Economics has just come out this morning, and it's full of interesting and useful articles. (I suppose that depends on your definition of "interesting," of course.) Here are some highlights:
The Arbitrage Mirage: Regulated Access Prices with Free Entry in Local Telecommunications Markets

Thomas W. Hazlett and Arthur M. Havenner

Incumbent telecommunications carriers have been mandated to share their networks with new retail service providers at regulated wholesale rates. This regulatory structure creates options which incumbent systems must write and which all potential entrants are awarded at a price of zero. Intense debate revolves around the effect of the policy in promoting investment in network infrastructure or retarding it. Rival viewpoints in the policy discussion, however, appear to share the fundamental position that the options issued entrants by incumbent network owners are a transfer of wealth. This paper notes that, to the extent that the regulations actually achieve their purpose in eliminating entry barriers, the assumption is incorrect. Eliminating the sunk costs associated with providing network services can result in regulatory arbitrage that reduces the value of the option to enter to zero. The U.S. market for local telecommunications has witnessed characteristic elements of this rent seeking competition, and financial markets suggest that investors have begun to incorporate the view that the regulated wholesale access regime results in zero long-term profits for entrants.

Dynamic Pricing and Investment from Static Proxy Models

David M. Mandy and William W. Sharkey

This paper evaluates the use of static cost proxy models in setting forward-looking prices such as the prices set according to the FCC's TELRIC methodology. First, it compares the time paths of prices and depreciation under traditional regulatory accounting with the prices and depreciation implied by various versions of TELRIC. When TELRIC prices are recomputed at intervals shorter than asset lives, the firm will generally not earn the target rate of return. In these cases, a correction factor must be applied to the TELRIC price path in order for revenues to exactly recover investment cost, including the target rate of return. Next, the paper considers a firm's cost minimizing investment decisions under two different assumptions about asset obsolescence. In both scenarios, cost minimizing investment paths and implied utilization rates for the firm's assets are derived under a variety of assumptions about the relevant input parameters. Some implications for TELRIC pricing are then derived.
And there's lots more.


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