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REGULATING TELECOMMUNICATIONS PRICING: INFORMATION REQUIREMENTS OF THE CPI-X RULE
Abstract
The Australian Government decided in the May Statement of 1988 to instruct the new telecommunications regulator to impose a price cap rule on Telecom Australia's basic or monopolised services, while relying on market forces to discipline prices in value added services and customer premises equipment markets. The rule “CPI-X” was explicitly invented for the regulation of British Telecom by OFTEL in 1983, and is to be used by OFTEL until at least 1993, the value of X changing every 4 years. Claims have been made that the rule is very economical of information required by the regulator. This paper suggests that such isnot the case.
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NOTES AND REFERENCES
Australia, Parliament, Australian Telecommunications Services: A New Frame-work. Statement by the Minister for Transport and Communications, 25 May, Canberra, AGPS, 1988.
op. cit., p.146.
op. cit., p. 147.
This term means that if all the outputs of the firm were to increase proportionately the average cost of the bundle of outputs would decrease. See W. F. Sharkey, The Theory of Natural Monopoly, Cambridge, at the University Press, 1982, p.65.
Vogelsang I. and Finsinger J.. 1979. . A regulatory adjustment process for optimal pricing by multiproduct monopoly firms. . Belt Journal of Economics . , Vol. 10((1)) Spring;: 157––171. .
These are known as Ramsey prices in the economics literature.
Littlechild S. C.. 1983. . Regulation of British Telecommunications’ Profitability . , London : : Department of Industry. .
op. cit, para. 13.20.
op. cit, para. 13.9.
Bradley I. and Price C.. 1988. . The economic regulation of private industries by price constraints. . Journal of Industrial Economics . , Vol. 37((1)) September;: 101
In fact, VF have been followed by a number of similar models associated with authors such as Finsinger, Vogelsang, Sappington, Baron and Laffont. The plethora of highly technical attempts at schemes for inducing good firm behaviour illustrates part of the present paper's argument that information is the scarce regulatory resource.
Sappington D.. 1980. . Strategic firm behaviour under a dynamic regulatory adjustment process. . Bell Journal of Economics . , Vol. 11((1)) Spring;: 360––372. .
The literature that grew out of O. Williamson, The Economics of Discretionary Behaviour, Chicago, Markham, 1967, exploring the agency problem, takes current argument even further. For present purposes, Williamson's concept of expense preference suffices.
Sappington, op. cit., p.368.
Bureau of Transport and Communications Economics, The Cost of Telecom's Community Services Obligations, Report 64, Canberra, AGPS, 1989, p. xvi.
Sappington, op. cit., p.368.
Hartley N. and Culham P.. 1988. . Telecommunications prices under monopoly and competition. . Oxford Review of Economic Policy . , Vol. 4((2)): 5
Telecom Australia does not collect such information. Instead they use arbitary rules that have grown with the firm, mostly dating from before 1975 when the PMG's Department was split up. See Bureau of Transport and Communications Economics, op. cit., p. xiv and Appendix IV.
This tendency is well illustrated by Telecom's proposals for costing its Community Services Obligations. Their method of costing gave figures up to three times the cost estimated by the more appropriate avoidable cost method. See Bureau of Transport and Communications Economics, op. cit. chapter 3 and Appendix IV.
A review of the period of the current rule, with issues for decision about the next period's regulatory regime is contained in OFTEL, The Regulation of British Telecom's Prices: A Consultative Document, 1988.
D. Helm, ‘Regulating the newly privatised industries: the RPI - X formula’, in C. Whitehead (ed.), Reshaping Nationalised Industries, unknown publisher, 1988.
Littlechild's intellectual debt is to writers such as von Mises and Hayek, or the more accessible Israel Kirzner. These are known as neo-Austrians or Subjectivists. This last sobriquet comes from their belief that it is the perceptions of actors, usually entrepreneurs, about the world that shape the future, not information about the past.
Littlechild, op. cit., para. 13.18.
The set of prices are Ramsey prices, but instead of the constraint being zero profit, it varies with the relation between allowable prices and costs. Figure 2 is a simple illustration for a single commodity. I. Bradley and C. Price, The regulation of British Telecom's prices, Discussion Paper No.72, Department of Economics, University of Leicester, p. 3, nearly makes this point, but consider only the firm making positive profits.
OFTEL, op. cit.
D. Brunker and T Shaw, CPI-X Price Control in Australian Telecommunications, Reference Paper 137, Canberra, Bureau of Transport and Communications Economics, 1989.
op. cit., pp.29–30.
OFTEL, op. cit., p.6.