Economics of Regulation and Antitrust by W. Kip Viscusi

Author:W. Kip Viscusi
Language: eng
Format: epub
Tags: environmental regulation; health economics; federal regulation; government; federalism; cost-benefit analysis; welfare; monopoly; innovation; industrial organization; market power; oligopoly; collusion; game theory; advertising; competition; bargaining; price fixing; limit pricing; mergers; Time Warner; General Electric; Comcast; NBC; contracts; Visa; Mastercard; Kodak; IBM; Standard Oil; United Steel; new economy; Microsoft; franchise; pricing; net neutrality; transportation; energy sector; financial regulation; regulatory reform; Dodd-Frank; risk; OSHA
Publisher: MIT Press

11

Alternatives to Regulation in the Market: Public Enterprise and Franchise Bidding, with an Application to Cable Television

Chapter 10 emphasized an important conflict that can arise if industry production costs are substantially lower when a single firm supplies the entire industry output. Although production costs may be minimized when a single firm serves all customers, the prices that consumers are charged may not be minimized. A monopoly supplier often is inclined to set prices well above relevant production costs. Therefore, even when monopoly supply ensures the lowest operating costs, it does not ensure the lowest prices.

To resolve this natural monopoly problem, governments often will authorize production by a single supplier and then regulate the prices that the monopoly supplier can charge for its services. Subsequent chapters in this book will review in detail precisely how such regulation has been implemented in a variety of sectors, including the communications, energy, and transportation sectors. First, though, we discuss two possible alternatives to such regulation in the market: public enterprise and franchise bidding.

A public enterprise is a firm that is owned by the government rather than by private shareholders. Local water, gas, and electricity distribution companies are sometimes owned by local municipalities rather than by private shareholders. Franchise bidding arises when a government awards the exclusive right to provide a service of a specified quality to the privately owned firm that offers to charge the lowest price for the service. Local providers of cable television service often are determined by franchise bidding.

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