Ellig Econ Deregulation In Network Industries Dec 2005
Transcript of Ellig Econ Deregulation In Network Industries Dec 2005
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Economic Deregulation in Network Industries: The “First Wave”
Jerry ElligSenior Research Fellow
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Outline
Focus on “first wave” of U.S. network industry deregulation (1975-90)
Economic effects
Explanations for the effects
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Why does this matter?
Get the facts straight
Avoid repeating mistakes
Understand causation to guide future decisions
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Network Industries
Local streetsHighwaysTrucks
AirportsAirways/ air traffic control
Airlines
Wireline localWireline long-distance
Telecom equipment
Local lines/ sidings
Trunk linesTrains
Local pipesInterstate pipesGas wells
“Distribution”“Transmission”“Production”
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Largely Private Ownership (blue)
Local streetsHighwaysTrucks
AirportsAir traffic controlAirlines
Wireline localWireline long-distance
Telecom equipment
Local lines/ sidings
Trunk linesTrains
Local pipesInterstate pipesGas wells
“Distribution”“Transmission”“Production”
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Deregulation of Prices and Entry
Govt ownedGovt owned1980Trucking
Govt ownedGovt owned1978Airlines
1996-
ongoing
Late 1970s-early 1990s
1970sWireline Telecom
1976-19801976-19801976-1980Rail
NoneSome entry mid-1980s
1978-1993Gas
“Distribution”“Transmission”“Production”
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“Open” or “Competitive” Access
Govt ownedGovt ownedN.A.Trucking
Govt ownedGovt ownedN.A.Airlines
1984-todayAT&T resale 1984
N.A.Wireline
Telecom
Mergers 1980-today
Mergers 1980-today
N.A.Rail
State-specific1983-1992N.A.Gas
“Distribution”“Transmission”“Production”
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% Real Price Reduction After …
28-58%
(1977-87)
3-17%
(1980-85)
N.A.Trucking
29%
(1977-87)
12%
(1977-82)
13%
(1977-79)Airlines
40-47%
(1984-94)
23-41%
(1984-89)
5-16%
(1984-86)Long-Distance
Telecom
44%
(1980-90)
20%
(1980-85)
4%
(1980-82)Rail
27-57%
(1984-94)
23-45%
(1984-89)
10-38%
(1984-86)Gas
10 years5 years2 years
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Annual Value of Consumer Benefits ($1995)
$4.2 billion$19.6 billionTrucking
$7 billion$19.4 billionAirlines
N.A.$5 billionLong-Distance Telecom
$4.7 billion$9.1 billionRail
N.A.$4-7 billion?Gas
NonpriceTotal
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Hypotheses
1. Reduced Market Power: Deregulation reduced monopoly prices to competitive levels
2. Increased Innovation and Entrepreneurship:Deregulation led to innovations that reduced costs and created unexpected sources of value for consumers
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Gas Price Regulation as a “Windfall Profits” Tax (1968-77) Customers buying cheap gas gained $38.7
billion ($1982)
Producers lost additional $6.7 billion due to reduced sales
Customers doing without due to shortage lost $51.7 billion
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All Consumers’ Gas Prices Fell
Figure G-1: Natural Gas Prices, 1984-95 ($1995)
0
1
2
3
4
5
6
7
8
9
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Source: Energy Information Administration
$/m
cf
Wellhead
Residential
Commercial
Industrial
Elec. Utility
Citygate
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Cost Reductions in Gas Transmission
Figure G-2: Transportation and Distribution Margins ($1995)
0
0.5
1
1.5
2
2.5
3
3.5
4
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Source: Energy Information Administration
$/m
cf Dist. Margin
Trans. Margin
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Gas Innovations
Market Hubs/Competition($2 billion savings annually)
Risk Management
Storage
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Rail Rate Reductions
Figure 2: Rail Revenues and Operating Expenses per Ton-mile ($1998)
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
cen
ts
RevenueOp expsOp exps-spec charges
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Rail Productivity Improvements
Figure 1: BLS Railroad Productivity Indices
0
20
40
60
80
100
120
140
160
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
MultifactorLaborCapital
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Rail Innovations
Shed excess capacity
Non-union short line and regional railroads
Unit trains/longer trains
Intermodal
Shipper-owned cars
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Rail Predictions vs. Actual
Pre-deregulation studies estimated deadweight loss of $100 million-$1 billion
No consensus on rate reductions
Excess costs estimated at $2.5 billion
Ex post studies show total benefits of $9 billion or more
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Long-Distance Telecom Prices
Real Consumer Price Index, Long-Distance Service
0
50
100
150
200
250
300
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source: Bureau of Labor Statistics, CPI web page
Interstate
Intrastate
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Long-Distance Telecom
Long distance revenues net of access charges
0
5
10
15
20
25
30
35
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
FCC, Telecommunications Industry Revenues (2002), p. 30
Ce
nts
/min
ute
Revs/min
Access charges/min
Revs-access charges
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Long-Distance Telecom Innovations
Fiber optic transmission
Digital switches
Total Factor Productivity accelerated after long-distance entry (1969-71) and AT&T divestiture (1984)
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Average Airline Fares
Figure A-1: Airline Yield (cents per RPM, $1995)
0
5
10
15
20
25
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
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Concentrated Hub Fares
Figure A-5: Yield at Single-Carrier Hubs, Cents/RPM ($1995)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1979 1984 1988 1994
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Flight Frequency Increased
Figure A-8: Total departures
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Small cities Medium cities
May-78
May-95
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Airline Innovations
Hub-and-spoke systems
Commuter carriers
Low-cost carriers
Bankruptcy to escape high labor costs
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Trucking Costs
Real Operating Cost Per Mile ($1987)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
1977 1987 1993
LTL carriers
TL carriers
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Trucking Productivity
Trucking Productivity Index
0
20
40
60
80
100
120
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
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Trucking Innovations
Shipment tracking
Vehicle monitoring (on-board computers)
Freight forwarders
Intermodal
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Conclusion
“[E]conomists found it difficult to predict, or even consider, changes in firms’ operations and technology, and consumers’ responses to these changes, that developed in response to regulatory reform ... deregulation led to cost reducing operational and technological innovations … that also benefited consumers.”
-- Clifford Winston, 1993
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Caveats
Mistakes were made
Improvement, not perfection
These examples mostly focus on replacing monopoly/cartel with competition, and/or removing regulation from a competitive industry
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For more information …
Robert Crandall and Jerry Ellig
Economic Deregulation and Customer Choice (1997)
available at
www.mercatus.org/regulatorystudies/article.php/839.html