SABINE BÖCKEM, University of Berne - Institute for Organization and Human Resource
Email: boeckem@iop.unibe.ch
ULF SCHILLER, University of Bern
Email: schiller@iuc.unibe.ch

We investigate cost-based access pricing in regulated network industries. Building on recent progress in the accounting literature, we show that a regulator must choose a particular depreciation schedule, namely, relative replacement cost depreciation in order to prevent the network provider from playing manipulative games with the cost-based access price. We then show that the network provider is put at a strategic disadvantage if the regulator sets the access price equal to long-run incremental costs and the downstream market is symmetric. This result may be understood by looking at strategic interaction in the downstream market where both firms are better off if they behave “softly�. If the regulator sets a low access price, he commits the downstream competitor to price aggressively. Then, the entire burden of softening competition must be borne by the network provider. Finally, since consumer prices are decreasing in the access price, we conclude that the regulator faces a tradeoff between low consumer prices and a level playing field on the downstream market.

MELISSA MARTIN, Arizona State University
Email: Melissa.Martin@asu.edu

In order to provide a richer understanding of the incentive-performance relationship, this study examines the efficacy of multiple simultaneous incentive systems when the inclusion of social preferences is considered. Using a sample of over 750 medical professionals, I test how multiple performance based incentive systems function in the presence of inequity aversion, a specific social preference. The results show that when employees exhibit high levels of inequity aversion performance suffers under a pay-for-performance scheme. Additionally, I examine how incentive systems will function with the addition of subjectivity in the presence of social preferences. The results show that when high levels of inequity aversion interact with subjectivity in the incentive scheme the negative performance effects are exacerbated.

RUSSELL W. PITTMAN, U.S. Department of Justice - Economic Analysis Group
Email: russell.pittman@usdoj.gov

Economists regularly decry the persistence with which firms set prices above marginal cost and thus, according to the economists, fail to maximize profits. But it is the economists who have it wrong - first, because variable accounting costs are not always a good proxy for marginal economic costs, but more importantly because in an industry with U-shaped cost curves, a firm at a long-run sustainable equilibrium faces increasing marginal costs - i.e., a rising shadow price on some constrained input - i.e., in general, a cost of capital. A corollary is that in such an industry the equilibrium mark-up over variable cost varies directly with the capital intensity of the firm.