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Splitting the Baby: An Empirical Test of Rules of Thumb in Regulatory Price Setting
Author(s) -
Randolph Beard T.,
Ford George S.
Publication year - 2005
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/j.0023-5962.2005.00291.x
Subject(s) - rule of thumb , agency (philosophy) , economics , phone , test (biology) , microeconomics , element (criminal law) , business , industrial organization , paleontology , linguistics , philosophy , epistemology , algorithm , computer science , political science , law , biology
Summary This article provides an empirical evaluation of a recent and important exercise in regulatory price setting in the United States. The 1996 Telecommunications Act required incumbent local phone companies to sell components of their network to rival firms at regulated prices, and the prices for these ‘unbundled network elements’ were based primarily on independent estimates of forward‐looking economic costs. Our econometric analysis reveals that, while cost is a primary determinant of element prices, the prices also reflect foregone retail profits for incumbent firms. Statistical tests suggest that ‘splitting the baby’ is an accurate positivist description of public agency behavior.