Price Cap Regulation of Telecommunications Services: A Long-Run Approach
With its recent Notice of Proposed Rulemaking the United States Federal Communications Commission (FCC 1987) has opened a discussion about the possible use of price caps to replace rate-of-return regulation for telecommunications services. The basic idea of these price caps is closely related to the RPI-X formula suggested by Littlechild (1983) for British Telecom and implemented there, along with British Telecom’s privatization, in 1984. This formula says that over a period of at least five years British Telecom is constrained in adjusting the prices for a basket of its basic services by the condition that the weighted average of these prices increase by no more than the Retail Price Index less “X” percent. In the prices of its other (nonbasic) services, British Telecom is only constrained by the market and by general laws on competition.
KeywordsTotal Factor Productivity Consumer Surplus Input Price Telecommunication Service Profit Level
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