21 Stan L Rev 548 (1969) Four Sections Natural Monopoly Profits Regulation: The Balance Sheet Cont.

21 Stan L Rev 548 (1969) Four Sections Natural Monopoly Profits Regulation: The Balance Sheet Cont. www.phwiki.com

21 Stan L Rev 548 (1969) Four Sections Natural Monopoly Profits Regulation: The Balance Sheet Cont.

Helms, David, Lifestyle Columnist has reference to this Academic Journal, PHwiki organized this Journal Chicago’s Best Ideas Lecture Series April 14, 2003 Natural Monopoly in addition to Its Regulation R in addition to al C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2003 R in addition to al C. Picker. All Rights Reserved. 21 Stan L Rev 548 (1969) Four Sections I. The Grounds as long as Regulating Prices, Entry, or Other Business Conduct in a Natural Monopoly Market II. The Theory in addition to Practice of Public Utility Regulation III. Proposals to Re as long as m the Regulatory Process IV. Alternatives in addition to Recommendations

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Natural Monopoly Profits “Thus, although a natural monopolist should be able to extract large profits, it is difficult from an ethical st in addition to point to distinguish an individual who obtains a high return by virtue of an interest in a natural monopoly from one who owns a strategically located plot of l in addition to in addition to watches its value rise year after year without any skill or ef as long as t on his part.” Regulation: The Balance Sheet “Summarizing the discussion to this point, there are different degrees of justifications as long as regulatory controls, but in no case do the benefits clearly outweigh the costs.” Cont. “There is no persuasive case as long as the regulation of specific rates in, or of entry into, natural monopoly markets; yet these have been important areas of regulatory activity, whose principal result has been to promote inefficient pricing in addition to to create unjustified barriers to entry in addition to competition.”

Cont. “The case as long as limiting a natural monopolist’s profits turns out, on careful examination, to be weaker than generally assumed. Moreover, either the cure may be worth little because regulatory agencies cannot clamp an effective lid on monopoly profits, or it may be worse than the disease.” In Conclusion “Our analysis of proposals as long as re as long as ming public utility regulation confirms our preliminary conclusion that is contribution to social in addition to economic welfare is probably negative. Regulation may be likened to the treatment of an ailment whose gravity is not known with a costly in addition to dangerous drug whose efficacy is highly uncertain. It can be improved, but I do not see how we can realistically hope to trans as long as m it into a fruitful instrument as long as advancing the public welfare.” In the Future “In the long run, there may be few natural monopolies, perhaps none, such is the pace of change in consumer taste in addition to in technology in a dynamic economy. It is not completely fanciful to envisage a time in which electric utilities will have to compete with manufacturers of nuclear-powered home generators or telephone companies with CATV operators. It regulation is not extended to embrace potential competitors of regulated firms, it may eventually wither away.”

1996 Act’s Local Competition Framework Three Key Changes Kills State Entry Barriers Feds preempt state entry barriers (47 USC 253(a)) Quarantine RBOCs Can’t enter long distance unless facilities-based local competitor exists (47 USC 271) Cont. Incumbent Local Exchange Carrier Access Rules (47 USC 251(c)) Interconnection Exchange in addition to completion of telephone calls Unbundling More on this Resale Offer telecommunications services as long as resale at wholesale rates Why UNEs Long Distance Success Story Separate local calling from long distance Microwave entry—facilities-based entry—as starting point Creates lots of competition in long distance Best example of unbundling (Kearney & Merrill, 1998) Mental model as long as 1996 Act approach

UNE Access St in addition to ards under 47 USC 251(d)(2) (2) Access st in addition to ards.-In determining what network elements should be made available as long as purposes of subsection (c)(3), the Commission shall consider, at a minimum, whether— access to such network elements as are proprietary in nature is necessary; in addition to Cont. the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer. Iowa Utilities (U.S., 1999) Two Issues FCC vs. State Jurisdiction Resolved in favor of feds, but not our issue Scope of Sharing Rules Rejected FCC rules Too broad, no limiting principles, redo them

USTA (D.C. Cir. May 24, 2002 Overturned FCC’s Second Set of Sharing Rules Insufficient market-by-market examination of needs as long as unbundling of particular elements Stayed Until Feb. 20, 2003 FCC Feb. 20, 2003 Orders D.C. Circuit Stay Expired Feb. 20, 2003 Revised FCC Orders Announced On Time So far, just press releases, no orders Key Features from PR UNE-P “The Commission finds that switching – a key UNE-P element – as long as business customers served by high-capacity loops such as DS-1 will no longer be unbundled based on a presumptive finding of no impairment. Under this framework, states will have 90 days to rebut the national finding.” “For mass market customers, the Commission sets out specific criteria that states shall apply to determine, on a granular basis, whether economic in addition to operational impairment exists in a particular market. State Commissions must complete such proceedings within 9 months.” “Upon a state finding of no impairment, the Commission sets as long as th a 3 year period as long as carriers to transition off of UNE-P.”

What is a Natural Monopoly “If the entire dem in addition to within a relevant market can be satisfied at lowest cost by one firm rather than two or more, the market is a natural monopoly, whatever the actual number of firms in it.” Natural Monopoly Is Natural Monopoly = Lowest Cost of Production of Any Amount of Good Using Single Facility Example Production Function: F(Q) = K + cQ Why Facility in addition to Not Firm Natural Monopoly One Owner Terminal Railroad (U.S., 1912) Electricity Grid Independent System Operators Regional Transmission Organizations

Posner: Entry in addition to Natural Monopoly “The possibility that more than one firm will find itself selling in a natural monopoly market is not, however, a substantial basis of concern about per as long as mance under natural monopoly. The situation is inherently unstable.” Cont. “As explained earlier, the fear of ruinous competition seems largely groundless. If a prospective entrant realizes there is room as long as only one firm in the market, it will not enter unless confident of being able to supplant the existing monopolist. ” Cont. “So long as a single firm can meet the market’s entire dem in addition to most efficiently, one can be reasonably confident that the market will shake down to a single firm .”

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Natural Monopoly in addition to the Number of Firms Natural Monopoly Monopoly May see entrant even with incumbent having natural monopoly production function Incentive to enter depends on entrant’s expectations about incumbent’s response Econ literature suggests “over-entry” problem (Mankiw & Whinston, (1986)) Case No. 1: The Tough Incumbent Entrant believes that Incumbent monopolist will slash prices to c, marginal cost, in response to entry Will E enter Answer No, just covers marginal costs, in addition to loses fixed cost of K Case No. 2: Price Competitors E believes in addition to E in addition to I will compete on price More precisely, an outcome of their interaction will be a situation in which E is happy with her price, given I’s price, in addition to vice versa. Will E enter

Case No. 2 Answer Probably not. Most natural outcome of this process, called Bertr in addition to competition, is P = c. Lowering prices slightly diverts the entire market to the seller in addition to increases profits. This repeats scenario 1 outcome in addition to no reason to enter Case No. 3: Quantity Competitors Switch from prices to quantities (Cournot competition) Look as long as an outcome in which E is happy with her quantity, given I’s quantity, in addition to vice versa. Will E enter Case No. 3 Answer Perhaps. Depends on: Parameter values Willingness of incumbent to share facility voluntarily

No Good Professors “It assumes that the instructor is fully conversant with the economic principles relevant to regulation, an assumption that in most cases is probably unwarranted.” If You Want More The Original Richard A. Posner, Natural Monopoly in addition to Its Regulation, 21 Stan L Rev 548 (1969) Two Papers as long as This Talk Lichtman & Picker, Entry Policy in Local Telecommunications: Iowa Utilities in addition to Verizon Forthcoming Supreme Court Review http://papers.ssrn.com/sol3/papers.cfmabstract-id=368040 Picker, Why Facilities-Based Competition Very prelim draft http://www.law.upenn.edu/ile/seminarseries.html

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