Global Price Caps and the Regulation of Access

Jean-Jacques Laffont and Jean Tirole

Brazilian Review of Econometrics, 2000, vol. 20, issue 1

Abstract: It is generally agreed that an intelligent interconnection policy is the key to an harmonious development of competition in the telecommunications industry. The paper first warns against some hazards associated with the dominant regulatory paradigms. By treating retail and wholesale prices asymmetrically, these paradigms may distort the structure of relative prices. They may further provide incumbents with incentives to exclude and to cross-subsidize. These perverse incentives generate a legitimate suspicion and lead regulators or courts to substitute their judgment fot the operators' business judgment. Second, the paper explains the intellectual underpinnings of an alternative mode of regulation, which consists in putting the operator's retail and wholesale activities into a single basket and thus in subjecting the firm to a global price cap. It provides an extensive discussion of the costs and benefits of global price caps, and shows that they do not distort the structure of retail and wholesale prices. Last, global price caps eliminate or substantially reduce the incentives for exclusionary behaviors and cross-subsidies, and thus allow a light-handed regulation.

Date: 2000
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