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Two pillars of priceentry regulation:

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Lessons 'learned' by the 1970s from 100 years of regulation. Natural monopoly generally isn't. Price-entry regulation stifles innovation, keeps prices high ... – PowerPoint PPT presentation

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Title: Two pillars of priceentry regulation:


1
Two pillars of price-entry regulation
  • Natural monopoly theory
  • Takings law

2
Natural Monopoly Theory
  • Competition doesnt work in some industries
  • They tend to be capital-intensive (railroads,
    utilities)
  • This creates barriers to entry
  • Also price cutting (high fixed costs, low
    variable costs)

3
In price-cutting markets, only the strong survive
  • Deep pockets can come from being big, or from
    selling in uncompetitive markets, as well as in
    competitive ones (cross-subsidization)
  • Cut your prices in competitive markets until the
    competition folds up
  • Then youve got the monopoly, and can charge what
    the traffic will bear

4
The solution to natural monopoly price and entry
regulation
  • Control entry into markets to promote as much
    competition as possible (but not to allow
    destructive competition)
  • Regulate price and quality of service (e.g.,
    cutting off electricity or heat for non-payment
    of bills)

5
But where do you set rates?
  • Minnesota Rate Caseif the regulated cant earn a
    fair rate of return on invested capital, its a
    taking (5th Amendment no-no)
  • Cost-of-service ratemaking
  • How much capital have they invested? (Prudency)
  • What rate of return are they getting from
    existing rates?
  • How would proposed rates affect that rate of
    return?
  • What is the going rate of return on invested
    capital?

6
Lessons learned by the 1970s from 100 years of
regulation
  • Natural monopoly generally isnt
  • Price-entry regulation stifles innovation, keeps
    prices high
  • There are many ways to keep competition from
    being destructive (including antitrust
    enforcement)
  • Lets de-regulate!

7
And a few whoopsies . . .
  • Continuing airline bankruptcies
  • The Savings and Load bailouts
  • Monopolization/government takeover of rail
    transportation
  • Enron sticking it to California

8
Where we are in 2004 Price-entry regulation is
dysfunctional, but we cant let it go completely
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