ABSTRACT
The purpose of this chapter is to examine the effect of alternative forms of regulation on an exchange carrier’s pricing and investment decisions, where investment is analyzed in terms of capacity expansion and in terms of improvements in infrastructure quality. Two forms of regulation are considered: rate of return and price cap regulation. It is becoming increasingly important to analyze the differential effects of these policies as exchange carriers expand their operations in both regulated and unregulated markets, further exacerbating the problems associated with implementing cost allocation rules. These rules serve to apportion the costs of resources used in the joint production of multiple services, which influences the rates charged for these services and thereby affect the firm’s investment decisions. Hence, the choice of regulatory policy has a direct effect on the efficiency with which the telecommunications infrastructure evolves, as well as important implications for the quality of that infrastructure.
