Demand for Regulation

Customers demand protection from utility exploiting market power and political power. Utilities demand protection from the government acting opportunistically and capturing future profits from sunk investments.

Once an investment is made in a telecommunications network, it is generally costly to withdraw the investment. This implies that the investment is sunk, meaning that it cannot be reversed. As a result, once an operator has made his sunk investment, the government (who has a short-term interest in keeping prices low) has an incentive to lower the operator's prices to a level that does not compensate the operator for the investment.

If the demand for regulation is in balance with the supply of regulation (from the political process), then only questions of optimal regulatory techniques remain (i.e., questions for the For example, if the goal was to decrease costs by 10%, the operator might have the latitude to determine whether to do this by negotiating lower input prices from suppliers, decreasing overhead, improving network reliability, obtaining lower-cost capital, or some combination of methods, including methods not mentioned in this paragraph.

The following study unit will discuss two main types of instruments of regulation:

• Pricing
• Licensing