Class 4 Wrap Up and Takeaways
GSB 42201: The Legal Infrastructure of
Business
Market Power:
Network Industries
Randal C. Picker
Leffmann Professor of Commercial Law
Senior Fellow, The Computation Institute
The Law School
The University of Chicago
773.702.0864/r-picker@uchicago.edu
Copyright © 2002-11 Randal C. Picker. All Rights Reserved.
Natural Monopoly
Economics

Underlying technology matters
Cost
function can push to having only a
single facility or producer
But even with that technology, we don’t
know how many competitors we will have
 Depends
on game that will emerge with
entry
 Cournot type quantity game may lead to
multiple firms in industry
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
2
Natural Monopoly Pricing

Two Issues
Above
MC Pricing Loses Welfare
MC Pricing Causes Insolvency

Two Approaches
Ramsey
pricing
Two-part pricing
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
3
Terminal Railroad



Classic Antitrust Case
Raises questions on the right
organizational structure for shared facilities
Joint ownership? Joint management?
Nondiscrimination in access rules?
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
4
Rate of Return Regulation

Investors face regulatory risk
Assets
can’t be switched to other uses
easily
Given natural monopoly status, price
regulation a frequent response

The Political Dilemma
How
does the gov’t commit to investors that
it will not expropriate after the fact through
rate setting?
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
5
Rate of Return Framework
62-133(b)(3): “Ascertain such public utility’s reasonable
operating expenses, including actual investment currently
consumed through reasonable actual depreciation”
62-133(a): “the Commission shall fix such rates as shall
be fair both to the public utilities and to the consumer”
Operating
Expenses
+
(
Rate of
Return
x
Rate
Base
)
=
Revenue
Requirements
62-133(b)(1): “Ascertain the reasonable original cost of the public
utility’s property used and useful, or to be used and useful within a
reasonable time after the test period, in providing the service
rendered to the public within the State, less that portion of the cost
which has been consumed by previous use recovered by depreciation
expense”
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
6
Modern Access Regulation

1996 Telcom Act as Leading Example
Identify
natural monopoly aspects of
industry and create access regime for those
Unbundled network elements with access at
favorable prices
Jump start competition in local telcom

Success?
Not
so much and intermodal competition
much more important
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
7
Non-Discrimination
Regulation

Network Neutrality Regulation as Modern
Spin on Terminal Railroad
What
is a legitimate basis for discriminating
in access? Quality of service
discrimination? Ownership source?
Should we apply these ideas to changes in
the Twitter API and if not, why not?
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
8
Standard Setting

Modern Networks are often Virtual
Organized
around industry joint standards
of the sort that we saw in the DVD materials
Often cases where only one standard will
be present importantly in the market place
Design of standard will create ex post
market power for patents
Control that through upfront
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
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Standard Setting
Control
that through upfront commitments
on pricing such as RAND and FRAND
The vagueness of those commitments can
create strategic opportunities
DOJ makes that concrete in the smartphone
patent closing letter
March 12, 2016
The Legal Infrastructure of Business. Copyright © 2002-12 Randal C. Picker.
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