Tuesday, May 14, 2002

Supreme Court vs TELRIC The Supreme Court ruled that TELRIC pricing is OK (NY Times). Reading through their tortured opinion shows how appalling suited lawyers are to this type of decision making.

Pages and pages of rambling, turgid prose, contortions over jurisdiction, parsing "market cost" vs "book cost" vs "embedded cost", flawed accounting notions of "cost" itself, cluelessness of Ramsey Pricing, and unwitting support of government mandated collusive contracts. Sigh. Business as usual from the regulated industry front.

To be fair, dealing with natural monopolies, such as local loop telco bottlenecks, is tough. On the one hand, you want marginal cost pricing because its best for society. On the other hand, if companies have NO opportunity to harvest residual rents, then they won't invest in new equipment, which means above marginal cost pricing.

TELRIC pricing, which the Supremes upheld, requires incumbent telcos to offer bottleneck network elements at marginal cost. Therefore neither entrants nor incumbents have any incentive to upgrade equipment, and neither of them have since this pricing scheme was installed in 1996. Moreover, incumbents have to offer telephone service to all people, so they charge high business rates to subsidize low consumer rates. Entrants have no such obligation, so they "cream skim" by offering cheap services to businesses, which means fewer subsidies for consumers.

There's no magic bullet for natural monopolies. If you want the efficient solution, you simply grant the monopoly the ability to perfectly price discriminate. This means they capture ALL the surplus, infuriate consumers (who will pay high prices) but create no dead weight loss (so is efficient) and makes entry by close substitutes very attractive (as cross market price elasticity becomes infinite). Essentially, everyone will be charged their maximum willingness to pay, and this'll make them so mad they will gladly switch to some near substitute. Ultimately, competition between close substitutes is the best way to force down prices in natural monopolies, e.g. cable vs DSL vs WiFi vs satellite competing for residential internet service.


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