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Cross-subsidization and cost misallocation by regulated monopolists

✍ Scribed by Timothy J. Brennan

Publisher
Springer US
Year
1990
Tongue
English
Weight
883 KB
Volume
2
Category
Article
ISSN
0922-680X

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✦ Synopsis

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 bome by ratepayers of regulated monopolies. We 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; we conclude with observations on strategic behavior and regulatory policy.

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