Telephone Pools and Economic Incentives

Dale E Lehman and Dennis L Weisman

Journal of Regulatory Economics, 1996, vol. 10, issue 2, 123-46

Abstract: We identify the incentive structure for a firm that participates in a pooling arrangement. These pooling arrangements have been common in the telecommunications industry, both in the United States and in Canada. We identify alternative mechanisms, including cost caps, yardstick competition, transfer prices, and fixed revenue allocators. A pooling firm has inferior incentives for cost reducing innovation, truthful reporting of costs, and avoidance of abuse relative to alternative mechanisms. These incentive problems are similar to those that arise under rate-of-return regulation. Notably, transfer/access pricing, does not rectify the poor incentives embodied in pools. However, pooling does facilitate demand enhancement, due to its ability to internalize potential network effects. Copyright 1996 by Kluwer Academic Publishers

Date: 1996
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