Effect of Joint and Common Costs Associated With Network Industries on Pricing Rules

Core References

Valuation and Costing Issues in Access Pricing with Specific Applications to Telecommunications
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 91-112.
Ergas, H.

Explains that common costs are likely to account for a substantial part of the total resources deployed in a telecommunications network. Argues that efficient recovery of these costs will require a mark-up over the attributable long-run costs of each service, including access and that the contribution sought for these costs from access services should reflect regulatory price distortions, notably so as to avoid inefficient entry. Further holds that to minimize the resulting economic costs, access prices should be structured in such a way as to secure the greatest contribution from infra-marginal traffic.

The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapters 3-5, 7.
Kahn, Alfred

Describes pricing issues in utility regulation, giving practical examples and explaining the underlying economics. Explains economic efficiency in the context of pricing. Considers marginal cost pricing, peak load pricing, short-run and long-run marginal costs, effects of scale economies, externalities, Ramsey pricing, fully distributed costs, and price discrimination.

Sectoral References

TELECOMMUNICATIONS

Cost Proxy Models and Telecommunications Policy: A New Empirical Approach to Regulation
Cambridge, MA: MIT Press, 2002, Chapter 9.
Gasmi, F., Kennet, D., Laffont, J.J., and W. Sharkey

Uses the cost function of a representative local exchange regulated telecommunications firm obtained from an engineering cost proxy model to assess the typical size of joint and common costs. Evaluates the extent of accounting and strategic cross-subsidizes that can be associated with vertical integration and their impact on pricing of the firm in the competitive segment.

Decision for Approving the Regulation for the Realization of the Top-down Long Run Incremental Costing Model by Mobifon S.A.
18 December 2003.
Romanian National Regulatory Authority for Communications

Describes the economics of estimating incremental costs in telecommunications and its use in pricing in a competitive environment.

TRANSPORTATION

Principles of Transport Economics
North Hampton, Massachusetts: Edward Elgar Publishing Company, 2004.
Quinet, Emile and Roger Vickerman

Provide a discussion on Ramsey pricing and multipart tariffs that lead to various degrees of price discrimination in transportation.

Key Words

Efficiency, Price structure, Marginal cost pricing, Marginal cost, Multi-part tariffs, Ramsey pricing, Two-part tariffs, Joint costs, Common costs

Case Studies

Economic Principles and Concepts as Applied to Municipal Water Utilities
Final Report to the Ontario Superbuild Corporation (project number SSB-018197), 2002.
GeoEconomics Associates Inc.

Electricity Tariff Structure Review: Alternative Tariff Structures: A Consultation Paper
CER/04/239, July 1, 2004.
NERA

Marginal Cost of Electricity Service Study
CER/04/240, July 1, 2004.
NERA

Final Determinations. Future Water and Sewerage Charges 2000-05: Periodic Review 1999
November 1999.
OFWAT

Setting water and sewerage price limits for 2005-10: Framework and Approach
Periodic Review 2004. March 2003.
OFWAT

Pricing Energy in Developing Countries
June 2001.
World Energy Council