Wholesale and retail prices are interlinked. Regulators need to be aware this link in regulating prices.
One option to address the link between wholesale and retail prices is to implement a double price cap (also known as a “global price cap”.
Under a global price cap plan, the regulator includes wholesale interconnection services in the price cap plan, and treats them as any other final good in implementing the price cap.
For example, in the United States, some state regulators control intrastate long distance interconnection prices through the same price cap mechanism that regulates retail prices. These price cap plans are partial examples of a global price cap; they are not full global price caps because local interconnection prices are regulated using cost-based price controls.
According to Laffonte and Tirole [1], a global price cap plan can incorporate a Ramsey pricing structure and has the following features:
- The wholesale service (access) is treated as a retail service and is included in the computation of the price cap, and
- Weights used in computing the price cap are determined exogenously and are proportional to forecast quantities of the associated services.
As Laffonte and Tirole state, “global price caps thus enable regulation to be more light-handed, for global price caps reduce perverse incentives and therefore diminish the need for regulatory oversight of the operator’s decisions.”
Endnotes:
[1] Jean-Jacques Laffont and Jean Tirole, Competition in Telecommunications, MIT Press 2000, page 174.