Economic Issues of Local Regulatory Forbearance

We are now starting to see true-facilities-based competition for wired voice and video services for the first time in many markets as the telephone and cable operators offer directly competing services. However, in the absence of regulation, services to residences and small businesses are still likely to be priced at other than truly competitive levels. This is due to the fact that prices in duopoly, or even oligopoly, markets are generally not the same as one would expect to see in markets with significantly larger numbers of service providers. The question is one of degree, specifically whether the results under duopoly are likely to be equal to or better, in both the short- and long-run, than those under regulated monopoly to warrant regulatory forbearance. One of greatest problems with the emerging duopoly markets is the potential of cream skimming. This leads to the quandary of how one balances the overall savings to consumers, on one hand, with the possible distributional issues, on the other. One aspect of the creamskimming question is whether the duopoly firms will focus on the higher-value consumers, leaving consumers who want basic service with little choice and, possibly, increased prices. This paper provides a context for the analysis of this problem and explores possible solutions.