EC 332
Spring 2002
REGULATED INDUSTRIES
Professor Meehan
Miller Library 241
Course Administration:
Required Texts:
W. Kip Viscusi, John Vernon and Joseph Harrington, Jr., Economics of Regulation and
Antitrust 3rd ed. (D.C. Heath Company, 2000). Hereafter referred to as VV&H
Course Pack (Articles listed in Sections IV and V of the reading list are in the course
pack)
Both the text and the Course Pack are available at the Bookstore. The outside readings in
Sections I, II, and III can be found at the Reserve Desk of the Library or on electronic-reserve. If
you have any trouble finding these readings at the Reserve Desk, let me know immediately. The
outside readings in Sections IV and V are contained in the Course Pack.
Read the questions at the end of the Chapters in VV&H and think about them.
Your course grade will be based on a mid-term examination, a final exam, two papers
(10-15pp), a couple of problem sets, and class participation. The weights will be 30% (midterm), 30% (final), 15% (for each paper), 5% (problems), and 5% (class participation).
You will be required to complete two papers during the semester. The first paper will be
on drug price regulations. It will be due in the middle of the semester. I will provide you with
more details on the paper and the due date within a week after the start of the semester. The
second paper will be on a topic of your choosing. There are many areas of regulation that we will
not cover in this course. I try to choose areas that are illustrate the principles and issues in
regulation. I want you to choose an area of regulation that is not covered in the course. You
should look at the justification for the regulation, how the regulation works, and your analysis
(you can use the published analyses of others but you should be prepared to defend your analysis)
of the effects of regulation. That is, do the benefits of the regulation exceed the costs of the
regulation? I will offer a few suggestions on possible topics within two weeks after the start of
the semester.
I will also assign several problem sets through out the semester.
I.
Introduction and Review, Perfect Competition, Market Failures and Optimal Regulations
without Intervention
VV&H, Chapters 1 (pp. 6-10) and 2
II.
The Case for Regulation--Natural Monopoly
EC 332 - Regulated Industries
Spring, 2002 - Page 2
1. Economics of Scale and the Definition of Natural Monopoly
VV&H, Chapter 11, pp. 337-350
2. Rate of Return Regulation
VV&H, Chapter 12, pp. 361-368 and 374-379
3. A - J - W Effect
VV&H, pp. 371-374
R. Sherman, The Economics of Industry, pp. 386-390. On Reserve.
4. Optimal Pricing (Rate Structure)
a. Price Discrimination (Ramsey Pricing)
VV&H, pp. 350-353
W. Baumol & J. Sidak, Toward Competition in Local Telephony, (1994), The
MIT press, Chapters 4,5,& 6 (pp. 49-92). On Reserve.
b. Peak Load Pricing and the Optimal Amount of Capacity
VV&H, pp. 379-386
Wenders, John T. and Lester P. Taylor "Experiments in Seasonal Time-of-Day
Pricing of Electricity to Residential Users," Bell Journal of Economics
(Autumn 1976) pp. 531-552, especially 539-551. E-Reserve and Reserve.
5. Regulation and Deregulation of Electric Power
VV&H, pp.386-393
Timothy Brennan, et. al., A Shock to the System: Restructuring America’s
Electricity Industry (1996) Resources For the Future, Chapters 1 through
6. On Reserve.
W. Baumol & J. Sidak, Transmission Pricing and Standard Costs in the
Electric Power Industry, (1995), The AEI Press, pp.98-114 and pp. 139158. On Reserve.
Paul Joskow, Restructuring Competition and Regulatory Reform in the US
Electricity Sector, Journal of Economic Perspectives (Summer 1997),
pp.119-136. E-Reserve and Reserve.
Paul Joskow, "California's Electricity Crisis," Oxford Review of Economic
Policy (forthcoming), E-Reserve
III.
Regulation in Dynamic Markets
1. Entry into Lucrative Markets (The Issues of Cream Skimming)
EC 332 - Regulated Industries
Spring, 2002 - Page 3
VV&H, Chapters 15 and 16 (pp. 495-511)
W. Baumol & J. Sdak, Toward Competition in Local Telephony (1994),
Chs. 7 & 8. On Reserve.
2. Current Issues in Telecommunications Regulations
a. Some General Issues inn Opening Competition
R.W. Crandall, "Managed Competition in U.S. Telecommunications," AeiBrookings Joint Center for Regulatory Studies, Working Paper #99-01
(March 1999). E-Reserve.
b. Bell Operating Companies Entry into the Long Distance Market?
M. Schwartz, "The Economic Logic for Conditioning Bell Entry into Long
Distance on the Prior Opening of Local Markets," AEI-Brookings Joint
Center for Regulatory Studies, Working Paper #00-04 (April 2000). EReserve.
c. Pricing Issues
J. Gregory Sidak and D. Spulber, "The Tragedy of the Telecommons:
Government Pricing of Unbundled Network Elements Under the
Telecommunications Act of 1996," Columbia Law Review (1997), pp.
181-1161. This paper can be found on Lexis-Nexis.
d. Unbundling and the Effect on Innovation and Investment
T. Jorde, J. Gregory Sidak, and D. Teece, "Innovation, Investment, and
Unbundling," Yale Journal on Regulation (Winter 2000), pp. 1-37.
Reserve.
e. An Overview of Policy Reform in the US and Canada
R. Crandall and T. Hazlett, "Telecommunications Policy Reform in the
United States and Canada," AEI-Brookings Joint Center for Regulatory
Studies, Working Paper 00-09 (December 2000). E-Reserve.
G. Faulhaber, “Policy-Induced Competition: The Telecommunications
Experiments,” This paper can be found on Professor Faulhaber’s web
page. The URL is:
http://rider.wharton.upenn.edu/~faulhabe/research.html. Just click on
the paper and you can down load it.
EC 332 - Regulated Industries
IV.
Spring, 2002 - Page 4
Deregulated Industries: Airlines
1.. A Brief History of Regulation and Deregulation
VV&H, pp. 552-583
Severen Borenstein, "The Evolution of U.S. Airline Competition," Journal of
Economic Perspectives (Spring '92), pp. 45-73. E-Reserve
2. Pricing
D. Graham, D. Kaplan, and D. Sibley, "Efficiency and Competition in the
Airline Industry, "The Bell Journal of Economics, (Spring '93),
pp. 118-138. E-Reserve
A. Kleit, "Competition Without Apology," Regulation (Summer, 1991),
pp. 68-75. Course-Pack.
3. Route Structures
S. Borenstein, "Dissipating the Airline Deregulation Dividend: The Decline
of
Competition at Hub Airports," Regulation (Fall, 1990), pp. 69-77.
CoursePack.
V.
The Case for Regulating Information
A. Buyer Ignorance: The Role of Advertising, Licensing and Direct Regulation
1. The Economics of Information and Advertising
a. Search Theory and the Implication for Prices
D. Carlton and J. Perloff, Modern Industrial Organization, 3rd ed. Chapter 13.
especially pp. 431-447. Reserve.
M.Smith, J. Bailey, & E. Brynjolfsson, “Understanding Digital Markets:
Review and Assessment,” working paper #140. E-Reserve. Click on paper
#140 of download.
b. Search Theory and the Effect on Consumer Choice
R. Pindyck and D. Rubenfeld, Microeconomics, 5th ed., (2000) Chapter 17,
pp. 595-609, 3rd ed. (1999). Reserve.
D. Carlton and J. Perloff, Modern Industrial Organization 3rd ed. (1999).
Reserve. Chapter 13, especially pp. 420-430. Reserve.
EC 332 - Regulated Industries
Spring, 2002 - Page 5
c. Advertising: Information Effects
J. Lacko, Product Quality and Information in the Used Car Market, (April
1986). Course-Pack.
P. Ippolito and A. Mathios, "Information, Advertising and Health Choices: A
Study of the Cereal Market," Rand Journal of Ecoomics (Autumn 1990),
pp. 459-480. E-Reserve
T. Hubbard, “An Empirical Examination of Moral Hazzard in the Vehicle
Inspection Market,” Rand Journal of Economics (Summer 1998) pp. 406426. Course-Pack.
d. Advertising: The Price Effects
John E. Kowoka, Jr., "Advertising and the Price and Quality of Optometric
Services," American Economic Review (March 1984) pp. 211-216. E-Reserve
2. Licensing
D. Hass-Wilson, "The Effect of Commercial Practice Restrictions: The Case of
Optometry," Journal of Law and Economics (April 1986) pp. 165-186. CoursePack.
3. Direct Government Regulation
VV&H, Chapter 22
Sam Peltzman, Regulation of Pharmaceutical Innovation, AEI, 1974 Skim
Chapters 1 and 2, read carefully Chapters 3 and 4. Reserve.
Henry G. Grabowski, Drug Regulation and Innovation, AEI, 1976, pp. 17-25; 2737; Chapters 4, 5, 6. Reserve.