Splitting the Baby: An Empirical Test of Rules of Thumb in Regulatory Price Setting

21 Pages Posted: 6 Aug 2005

See all articles by Thomas Randolph Beard

Thomas Randolph Beard

Auburn University - Department of Economics

George S. Ford

Phoenix Center for Advanced Legal & Economic Public Policy Studies

Abstract

This article provides an empirical evaluation of a recent and important exercise in regulatory price setting in the United States. The 1996 Telecommunications Act required incumbent local phone companies to sell components of their network to rival firms at regulated prices, and the prices for these 'unbundled network elements' were based primarily on independent estimates of forward-looking economic costs. Our econometric analysis reveals that, while cost is a primary determinant of element prices, the prices also reflect foregone retail profits for incumbent firms. Statistical tests suggest that 'splitting the baby' is an accurate positivist description of public agency behavior.

Suggested Citation

Beard, Thomas Randolph and Ford, George S., Splitting the Baby: An Empirical Test of Rules of Thumb in Regulatory Price Setting. Kyklos, Vol. 58, No. 3, pp. 331-351, July 2005. Available at SSRN: https://ssrn.com/abstract=771701

Thomas Randolph Beard (Contact Author)

Auburn University - Department of Economics ( email )

415 W. Magnolia
Auburn, AL 36849-5242
United States

George S. Ford

Phoenix Center for Advanced Legal & Economic Public Policy Studies ( email )

5335 Wisconsin Avenue, NW
Suite 440
Washington, DC 20015
United States

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