Stabsseminar ved Kenneth Fjell

Dr. Kenneth Fjell ved SNF/NHH holder stabsseminar ved Institutt for foretaksøkonomi torsdag 14. desember.

12.12.2000 - Elin F. Styve

Tema er An analysis of Price Cap Regulation in the Norwegian Telecommunication Sector

Tid og sted:
Torsdag 14. desember kl. 1215-1330 i Karl Borchs aud.

Kontaktperson: Hans K. Hvide (9283)

Abstract
Price cap regulation is often considered to provide the strongest incentives for cost efficient operation by the regulated firm. However, if the regulated firm is able to achieve substan-tial cost reductions and thereby increase profit, it is tempting for the regulator to lower the price cap. Such a practice would, however, eliminate the credibility of incentive and reduce price cap regulation to a de facto profit constraint. To make the in-centive credible, an exogenous variable is often used to dictate future adjustments to the price cap. In Norway, regulators have adopted this approach by adjusting the price cap for the dominant telecommunications firm relative to the Consumer Price Index. The weighted average of prices for next year should be at least equal to the Consumer Price Index (CPI) less X (the real price reduction percentage). The respective price weights for the current year are last years revenue shares for the respec-tive products/services. However, this provides an opportunity for strategic behavior on the part of the regulated firm in that it can influence the weights of its future pricecap. For instance, it may attempt to reduce all prices in a manner which equates marginal profit for each service. Even under strict assumptions of constant price elasticities and cross-price elasticities equal to zero, it is not obvious that this is the optimal strategy. One problem which the firm faces is the potential loss of flexibility by an asymmetric development of weights which causes one weight to so dominate the others, that the firm can only meet the price cap by reducing the price of that serv-ice.
In this paper we present an optimization formulation of the problem that the regulated firm phases and presents some pre-liminary results based on small scale examples of potential strategies.