Interdisciplinary Telecommunications ProgramUniversity of Colorado &Hagler BaillyCopyright © 1997, 1998; James Alleman. All Rights Reserved.James AllemanCompetitive PolicyJames Alleman University of Colorado & Hagler BaillyPublic Policy OverviewRole of CompetitionCompetitive OverviewMergers/AcquisitionsPrice DiscriminationCross-subsidiesConclusionAgendaJames Alleman University of Colorado & Hagler BaillyPublic Policy OverviewGoalsInstrumentsObstaclesJames Alleman University of Colorado & Hagler BaillyPublic Policy OverviewCost Minimization"Correct" PricesRent Extraction (Monopoly)Equity?James Alleman University of Colorado & Hagler BaillyPublic Policy Overview"...unleashing monopolies before real competition could mean..." Higher prices for consumersHinder competition James Alleman University of Colorado & Hagler BaillyPublic Policy Overview"...unleashing monopolies before real competition could mean..." Higher prices for consumersHinder competition Transitional safeguards needed 1-6James Alleman University of Colorado & Hagler BaillyPublic Policy Overview"...unleashing monopolies before real competition could mean..." Transitional safeguards neededRBOC's 14 pointsJames Alleman University of Colorado & Hagler BaillyPublic Policy: InstrumentsRegulation/Social ControlRate of Return Regulation (ROR)Benchmark (Yardstick)Incentive RegulationNo RegulationAntitrust / Monopoly PolicyJames Alleman University of Colorado & Hagler BaillyIncentive/Price Caps RegulationCompetitive Entry EncouragedLimit on the Incumbent's PricesProductivity FactorJames Alleman University of Colorado & Hagler BaillyRole of CompetitionAllocation of ResourcesIncentive for EfficiencyThreat of Entry DisciplineJames Alleman University of Colorado & Hagler BaillyRole of CompetitionIncentive for EfficiencyPrices => costsPressure to reduce costsSelection of more efficient firmsPromote innovationDiminish regulatory imperfectionsJames Alleman University of Colorado & Hagler BaillyAdditional Motivation for CompetitionProduct DifferentiationCost DifferencesBenchmark Competition (Yardstick) 7-12James Alleman University of Colorado & Hagler BaillyCompetitive Policy OverviewInstitutional Advantage (Incumbent)Technology Advantage (Incumbent)Regulatory/Competitive SynergyNuttall, Robin and John Vickers, Competition Policy for Regulated UtilityIndustry in Britain, Applied Economics Discussion Papers, Institute of Economics and Statistics, Oxford No. 178, February, 1996.James Alleman University of Colorado & Hagler BaillyCompetitive Policy OverviewInstitutional Advantage (Incumbent)Institutionalized cross-subsidiesName recognitionEstablished customer-baseJames Alleman University of Colorado & Hagler BaillyCompetitive Policy OverviewInstitutional AdvantageTechnology Advantage (Incumbent)NumberingMetering?High customer switching costsJames Alleman University of Colorado & Hagler BaillyCompetitive Policy Assessment Competitive EntryMerger/Acquisition PolicyPrice DiscriminationCross-SubsidiesUniversal Service ObligationsJames Alleman University of Colorado & Hagler BaillyCompetitive Policy Overview... Competitive/Regulatory SynergySubstitutes for regulationComplements regulationRegulation can distort competitionJames Alleman University of Colorado & Hagler BaillyMergers/Acquisitions/Joint VenturesPrinciplesPolicy Recommendations 13-18James Alleman University of Colorado & Hagler BaillyMerger Policy ImpactHorizontal Mergers AllowedJames Alleman University of Colorado & Hagler BaillyHorizontal Mergers AllowedEliminates Competition Removed Benchmark CompetitionEconomies of Scale?Access Bottleneck Enhanced?James Alleman University of Colorado & Hagler BaillyIntermediate Price ProblemMarket ForeclosureEconomies of ScopeVertical MergersJames Alleman University of Colorado & Hagler BaillyEconomies of ScopeConglomerate MergersJames Alleman University of Colorado & Hagler BaillyPrice DiscriminationPrincipalsPolicyRecommendationsInterdisciplinary Telecommunications ProgramUniversity of Colorado &Hagler BaillyCopyright © 1997, 1998; James Alleman. All Rights Reserved.James AllemanPrice Discrimination 19-24James Alleman University of Colorado & Hagler BaillyPrice DiscriminationCost JustifiedNot Simply Uniform PriceNot PejorativeNon-linear PricesJames Alleman University of Colorado & Hagler BaillyPrice DiscriminationFirst-degreeSecond-degreeThird-degree James Alleman University of Colorado & Hagler BaillyPrice DiscriminationFirst-degree (perfect)Captures total consumers' surplusPareto efficient / outputCannot improve CS + PSDemand curve is marginal revenueExampleGenericDoctor? James Alleman University of Colorado & Hagler BaillyPrice DiscriminationFirst-degreeSecond-degreeGroup customersCollege students/elderlyBusiness travelers/customersDifferent prices for groupsSame discounts, all customersSelf-selectingJames Alleman University of Colorado & Hagler BaillyPrice DiscriminationFirst-degreeSecond-degreeGroup customersDifferent prices for groupsSelf-selectingExample (graphic & airlines)(Varian, p.428)James Alleman University of Colorado & Hagler BaillyPrice DiscriminationFirst-degreeSecond-degree (Non-linear Pricing)Group customersDifferent prices for groupsSelf-selectingExampleQuality or quantityMay be Pareto improving 25-30James Alleman University of Colorado & Hagler BaillySecond-degree Price DiscriminationPriceQuantityP Q1ABCQ2James Alleman University of Colorado & Hagler BaillySecond-degree Price DiscriminationPriceQuantityP Q1ABCQ2James Alleman University of Colorado & Hagler BaillySecond-degree Price DiscriminationPriceQuantityP1P2 Q1ABQ2CDJames Alleman University of Colorado & Hagler BaillyPrice DiscriminationNon-linear Pricing (Second-degree)Volume (quantity) discountsDeclining block pricingBulk tariffsEfficiency / welfare enhancing James Alleman University of Colorado & Hagler BaillyPrice DiscriminationNon-linear PricingEfficiency ImprovedExamples: Mr. Bid and LittlePeak/Off-peak pricingSelf-selecting two-part tariffsJames Alleman University of Colorado & Hagler BaillyPrice DiscriminationFirst-degreeSecond-degreeThird-degree Different Prices, Different