The Pricing of Inputs Sold to Competitors

Abstract

Local telephone companies have long been regulated as natural monopolies. However, technological innovation and the prospect of falling regulatory barriers to entry now expose some portions of the local exchange to competition from cable television systems, wireless telephony, and rival wireline systems. Nevertheless, it is probable that certain parts of local telephony will remain naturally monopolistic. In these cases the local exchange carrier must be permitted to sell necessary inputs to its competitors in the market for final telecommunications products at a price that reflects all its costs, including opportunity costs. This essay explains in nontechnical terms the derivation and logic of the efficient component-pricing rule, or ECPR. The authors' analysis applies to any network industry. Thus, it is useful in antitrust analysis of essential facilities and in regulatory analysis of transportation, energy transmission, pipelines, and mail delivery.