Academic journal article Economic Inquiry

The Demand to Regulate Franchise Monopoly: Evidence from CATV Rate Deregulation in California

Academic journal article Economic Inquiry

The Demand to Regulate Franchise Monopoly: Evidence from CATV Rate Deregulation in California

Article excerpt

THE DEMAND TO REGULATE FRANCHISE MONOPOLY: EVIDENCE FROM CATV RATE DEREGULATION IN CALIFORNIA

The motivation to price control a franchise monopoly is examined in the context of three distinct economic views of regulatory behavior. These views are tested against data from the California cable television market, over the years 1980-85, during which a subset of monopoly firms converted from regulated to unregulated pricing for basic cable service. As the price constraints of regulation appear to be insignificant in a welfare analysis, the demand for such controls by municipalities is derived from their utility in enforcing vote-maximizing transfer schemes--a Peltzmanian political outcome with a Stiglerian economic welfare result.

I. INTRODUCTION

Since the pathbreaking inquiry by Stigler and Friedland [1962], it has been fair game for economists to investigate how the publicly stated goals of regulation square with the observed economic results. Whereas empirical research has often revealed a surprisingly low correlation, theoretical models of political behavior have been developed to explain how regulators would rationally attempt to maximize political strength (and hence personal utility) by pursuing a support-maximizing transfer scheme. How far such incentive structures for regulators go toward enhancing consumer welfare is the primary concern of public policy analysis by economists.

Indeed, the study of regulatory results has yielded new insights into the antecedent demand for regulation. When publicly announced goals are not achieved, economists are often tempted to attribute the discrepancy not to random error, but to a strategic desire to mask intended transfer schemes. Hence, results of regulation can shed light on the motives for regulation.

This paper inquires into the motivations for municipal regulation of the cable television market. Part II sets three previously developed views of regulatory behavior into a unified framework and reviews previous research on price regulation in the electric utility industry. Part III describes an efficiency test for cable rate regulation in California. In a sector dominated by municipally assigned franchise monopolies, price and output effects of regulation are likely to be most dramatic, and hence most informative. Moreover, cable's changing regulatory regime offers grist for analysis. In part IV, I examine evidence from the 1979 (partial) deregulation of CATV in California and draw inferences regarding the demand to regulate cable franchises in part V. My conclusions appear in part VI.

II. REGULATORY BEHAVIOR

At least three alternative models of regulatory behavior have been advanced in the literature. Looking at the world in the Peltzman [1976] sense, politicians (regulators) are seen as engaging in two-dimensional support-maximization. In that redistributing income (by whatever institutional method) necessarily involves losers as well as winners, some "competitive equilibrium" of transfers will be achieved by maximizing political actors (see Figure 1, panel (a)).

As a rule, regulators will transfer wealth from consumers and towards the regulated industry just up to the point at which the marginal (industry) support gained is equal to the marginal (consumer) support lost. Fortuitously, Peltzman's paradigmatic political-regulatory decision focuses upon the correlation between output price and profits of a regulated public utility (seen in the "profit hill" in panel (a) of Figure 1) and the trade-off faced specifically by the regulatory agent in gaining support from one constituency at the cost of support from another (as in the [U.sup.p] indifference curve in Figure 1). This framework dovetails with the discussion of price regulation in cable to follow.

Peltzman saw the regulator as a public policy auctioneer garnering maximum political support from both consumers and producers in establishing an optimal regulated price. …

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