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Cost Proxy Models and Telecommunications Policy: A New Empirical Approach to Regulation

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The telecommunications industry defies easy characterization. The long-distance sector is highly competitive and the local exchange sector much less so, while digital transmission and switching have blurred the distinction between traditional voice communication and the transmission of video and data messages.
Regulation of this industry has generally been considered necessary because it has aspects of a natural monopoly.This book takes an empirical approach to natural monopoly and the need for regulation of telecommunications. The centerpiece of the analysis is a sophisticated engineering cost proxy model, the local exchange cost optimization model (LECOM). The book, which is largely methodological, shows that a combination of LECOM, econometrics, and simulations can aid policy discussion of such contentious issues as incentive regulation, natural monopolies, estimating the cost of interconnection among networks, and the obligation of universal service. The book presents a theoretical framework to explain the incentives of firms and the power of regulation and then uses LECOM to test the theoretical implications. The work is unusual in that it applies the foundations of regulation theory to a model of an industry rather than applying econometric theory to historical cost data. The book includes a CD-ROM containing the data set the authors used to analyze their model.

The MIT Press

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What People Are Saying

From the Publisher

"This book is an important tool for regulators and policy analysts interested in implementing sound policies for the regulation of imperfect competition in local monopoly services and for instituting universal service programs. The theoretical rationales expose many of the problems with historic regulatory and subsidy programs and set a framework for implementing efficient forward-looking solutions. In addition, it provides a promising new avenue for ways to do empirical economic research."--Gregory L. Rosston, Deputy Director, Stanford
Institute for Economic Policy Research, Stanford University

The MIT Press

"The answer to virtually every important question in the field of empirical regulation depends on estimates of the firm's cost function--estimates that have been notoriously poor in past telecommunications studies. The authors'
cost proxy model approach, enabling a unified empirical study of natural monopoly,
universal service, and optimal regulation, takes a giant step toward a New Empirical
Regulatory Economics."--James E. Prieger, Department of Economics, University of
California Davis

The MIT Press

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Product Details

  • ISBN-13: 9780262072373
  • Publisher: MIT Press
  • Publication date: 9/9/2002
  • Series: Regulation of Economic Activity
  • Pages: 274
  • Product dimensions: 6.00 (w) x 9.00 (h) x 0.75 (d)

Meet the Author

Farid Gasmi is Professor of Economics at the Université de Toulouse.

D. Mark Kennet is Associate Professor of Telecommunications at George Washington

Jean-Jacques Laffont was Professor of Economics at theUniversité des Sciences
Sociales de Toulouse and the InstitutUniversitaire de France and Director of the
Institut d'EconomieIndustrielle.

William W. Sharkey is a Senior Economist at the Federal Communications

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