Abstract and Keywords
This article considers how regulators set prices in network industries. Traditionally this was done by setting prices to end users for services produced by a vertically integrated electricity, postal, telecommunications, or water company; prices being set either on the basis of costs incurred or, latterly, via a process of incentive regulation which gives firms an incentive to reduce costs over time. However, more recent regulation has switched the focus to allowing entry by competitors into potentially competitive parts of the value chain, and permitting such entrants to buy access to the incumbent's monopoly infrastructure. This article reviews the principles for setting such network access prices adopted in the energy and telecommunications market places, and discusses their effects. An alternative approach is to encourage pricing agreements negotiated between providers and purchasers of such wholesale network services.
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