Global Price Cap and Incentives to Exclude

Recall that a major drawback of LRIC regulation is that it does not allow the operator to make a margin on its bottleneck segment. The operator then has strong incentives to deny access to its rivals through nonprice methods, which in turn call for close monitoring by regulatory agencies. Incentives for exclusion are much attenuated if treatment of accessservices as a normal business segment is allowed and the operator can make money on them.

Under a global price cap (GPC), the operator manages its product lines "symmetrically," as it has no built-in incentive to favor one over another. In particular, excluding buyers of interconnection services amounts to mutilating a potentially quite profitable activity. A global price cap provides the operator with the flexibility to choose which product lines, retail or wholesale, are profitable. The theoretical analysis confirms that behavior that excludes rivals, raises their costs, or limits their demand tends to reduce the operator's profit. This reduction is particularly clear in the case where rivals have no market power and the exclusionary practice consists in raising the rivals' cost. The exclusionary practice then is tantamount to the operator's raising its own cost of providing the retail service through the competitive rivals. In contrast, we saw that even in this simple case the operator has a strong incentive to exclude under fragmented regulation. Therefore, one should not hastily transpose concerns that are legitimate under fragmented regulatory schemes to global price cap regulation.

Global price caps thus enable regulation to be more light-handed, for global price caps reduce perverse incentives and therefore diminish the need for regulatory oversight of the operator's decisions. A global price cap scheme, therefore, is more compatible with deference to the operator's business judgment than existing schemes. A global price cap, however, still involves discretion with respect to the weights in the cap and to their revision process.

Global Price Cap and Predation Global price caps raise the possibility of predation. To the extent that predation is often mingled with exclusion, a more common practice, this fear may be exaggerated, for we have observed that a global price cap tends to eliminate, rather than create, incentives for exclusion.

A price squeeze, however, is easy to carry out under a global price cap: The operator can increase the access charge and reduce its final price while keeping the price cap constraint satisfied. It thereby hurts its rivals on the retail market considerably. One can then conceive of use of this strategy for predatory purposes. That is, the operator might reduce its profit until the next price review, but eliminate rivals who otherwise would have been used by the regulator as benchmarks in the future. The profitability of such predatory behavior unfortunately has not yet been analyzed; one can only presume that the threat of predation is more relevant when competitors do not have a long purse and when their assets cannot easily be purchased and managed by another company in case of bankruptcy.