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Dynamic Pricing and Investment from Static Proxy Models

The Review of Network Economics

Vol. 2, Issue 4 - December 2003, pp 404-439

  David M. Mandy
Department of Economics, University of Missouri
E-mail: [email protected]
William W. Sharkey
Office of Strategic Planning and Policy Analysis, Federal Communications Commission, Washington, D.C.

  This paper evaluates the use of static cost proxy models in setting forward-looking prices such as the prices set according to the FCC's TELRIC methodology. First, it compares the time paths of prices and depreciation under traditional regulatory accounting with the prices and depreciation implied by various versions of TELRIC. When TELRIC prices are recomputed at intervals shorter than asset lives, the firm will generally not earn the target rate of return. In these cases, a correction factor must be applied to the TELRIC price path in order for revenues to exactly recover investment cost, including the target rate of return. Next, the paper considers a firm's cost minimizing investment decisions under two different assumptions about asset obsolescence. In both scenarios, cost minimizing investment paths and implied utilization rates for the firm's assets are derived under a variety of assumptions about the relevant input parameters. Some implications for TELRIC pricing are then derived.

Keywords: access pricing, telecommunicatons, TELRIC, FCC

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