Cross-Subsidization and Cost Misallocation by Regulated Monopolists

Timothy Brennan

Journal of Regulatory Economics, 1990, vol. 2, issue 1, 37-51

Abstract: While cross-subsidization is understood theoretically as involving the sustainability of a cost allocation scheme, it is invoked in regulatory policy contexts, such as the divestiture of AT&T, where costs of serving unregulated markets may be borne by ratepayers of regulated monopolies. The authors analyze two cross-subsidization tactics--cost misallocation and distorted technological choice--under a spectrum of regulatory cost allocation policies. These tactics lead to higher prices in regulated markets and inefficient production in unregulated markets. Welfare effects are discussed; concludes with observations on strategic behavior and regulatory policy. Copyright 1990 by Kluwer Academic Publishers

Date: 1990
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