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The absence of an effective demand response mechanism, combined with episodic supply deficiencies, recently led the author to endorse a joint letter to the Federal Energy Regulatory Commission (FERC) supporting price caps on a limited and temporary basis. But by far the preferable solution is to establish the conditions necessary for an elastic demand response to shortages, allowing us to shift our reliance back from the artificial constructs of reserve requirements and capacity markets.

The recent history of the airline, telecommunications and electric utility industries years amply demonstrates the benefits of deregulation. It also demonstrates both the necessity of continued government involvement and its pitfalls. Prominent among the former are the efficient provision and pricing of infrastructure services, enforcement of antitrust-like policies and regulation of bottleneck facilities. The latter come down to an inherent tendency of regulators to engage in continued micromanagement—to continue to assume responsibility not merely for opening the door to competition but for ensuring that competitors go through it, and to prescribe the results they think an efficient competitive process would produce.

The competitive free-for-all that Congress envisioned in the 1996 Telecommunications Act has for the most part not appeared. The Act calls for two forms of regulatorily-assisted entry into local markets: lease of network elements and resale. The FCC has decreed that the charges for those elements and the resale discounts must emulate the costs of an ideally-efficient firm. This standard is in fact not efficient, and the FCC’s attempt to jump-start the entry of competitors in this way has short-circuited the competitive process itself and jeopardized achievement of the goals of the Act.

Regulation has several important duties in the transition of the electricity industry to competition. But in fulfilling these responsibilities, regulators must refrain from policies pressed upon them by consumer representatives, on one side, and would-be rivals of utility companies, on the other, that would artificially handicap utilities and blunt the salutary forces of competition.

The introduction of competition into the electric power industry must be reconciled with the pre-existing and continuing regulatory regime if it is to be in the public interest. In particular, the equitable and efficient way of handling stranded costs is to shift them on to all uses of the wires, utility and non-utility alike.

Hub-and-spoke has become the predominant configuration of airline routes, with individual hubs typically dominated by single carriers. These operations have characteristics of natural monopoly; but dominance is a consequence also of advantages that cannot be subsumed under the rubric of superior efficiency. The carrier with the strongest presence attracts a grossly disproportionate amount of traffic and, secondarily, of the high fare-paying traffic originating at the hub. While the welfare consequences of the consequent price discrimination are ambiguous, United's acquisition of 50 additional slots at the slot-constrained O'Hare airport raised a legitimate Clayton Act Section 7 issue.

In the authors' shared opinion, the economic evidence does not support the regulations proposed in the Commission’s Notice of Proposed Rulemaking Regarding Preserving the Open Internet and Broadband Industry Practices (the “NPRM”). To the contrary, the economic evidence provides no support for the existence of market failure sufficient to warrant ex ante regulation of the type proposed by the Commission, and strongly suggests that the regulations, if adopted, would reduce consumer welfare in both the short and long run. To the extent the types of conduct addressed in the NPRM may, in isolated circumstances, have the potential to harm competition or consumers, the Commission and other regulatory bodies have the ability to deter or prohibit such conduct on a case-by-case basis, through the application of existing doctrines and procedures. Hence, the approach advocated in the NPRM is not necessary to achieve whatever economic benefits may be associated with prohibiting harmful discrimination on the Internet.

This paper assesses the increasing tendency of public utility regulators in the 1980s to require utility companies to practice ‘least cost planning’ and in particular to treat demand side conservation measures on a parity with expansion of supply. It discusses the magnitude and causes of the persistence of unexploited opportunities for efficient conservation. Its principal conclusions are that subsidies for conservation should be limited to the extent to which the marginal cost of electricity supply exceeds the price, and that conservation programs should minimize the cross-subsidization of participants by non-participants.

The signatories to this document are economists who have studied telecommunications, auctions, and competition policy. While we may disagree about the stimulus package, we believe that it is important to implement mechanisms that make stimulus spending as efficient as possible. To that end, we have come together to encourage the National Telecommunications Information Agency (NTIA) and Rural Utilities Service (RUS) to adopt auction mechanisms to allocate broadband stimulus grants. The broadband stimulus NOI asks which mechanisms NTIA and RUS should use to distribute grants and how those mechanisms address shortcomings in traditional grant and loan programs. In this note we explain why procurement auctions are more efficient and more consistent with the stimulus goals of allocating funds quickly than a traditional grant review process. We recommend that NTIA/RUS use procurement auctions to distribute at least part of the stimulus funds. The American Recovery and Reinvestment Act (ARRA) requires NTIA/RUS to distribute $7.2 billion in broadband subsidies. The broadband component of the Act has dual, and not entirely consistent, objectives of providing immediate economic stimulus and improving broadband service. NTIA/RUS faces a formidable challenge in determining how to spend the money quickly and efficiently in ways that meet these goals. The traditional grant application process is long, complicated, and involves subjective and arbitrary decisions regarding which projects to fund. In other words, requesting and reviewing grant applications is not an effective way to implement the plan. Procurement auctions, in contrast, provide a mechanism that can allocate grant money quickly, efficiently, and according to well-defined rules. As a result, procurement auctions offer NTIA/RUS the most promising method of maximizing broadband improvement while also creating some level of “temporary, timely, and targeted” stimulus. We therefore strongly recommend that NTIA/RUS adopt procurement auctions as its preferred method of distributing grants. This memo has three parts. First, it explains why the traditional grant application process is unsuitable for this task and why procurement auctions are better suited. Second, it sketches out a procurement auction plan. This plan is intended to be a starting point from which auction design experts would proceed to build and implement a fully functional auction. Finally, we explain that even if policymakers are skeptical of procurement auctions, one could be implemented quickly as part of an initial tranche of stimulus funding in order to test its efficacy relative to traditional approaches. This approach would allow NTIA/RUS to quickly expand upon or modify the procurement auction program in subsequent funding rounds.

By focusing on my role in airline deregulation, Philip Weiser's generous characterization of me as a political entrepreneur slights the large part of my career, expounding and then applying the economics of regulation to New York's public utilities. It fails also to convey the gradualness of my realization, at the CAB, that there was no acceptable half-way house between the thoroughgoing regulation I had inherited and genuine deregulation eighteen months later. Finally, it overlooks the contradiction most 18th century liberals would see between my efforts at the CAB and my conception of the strong antitrust policy that logically accompanies deregulation.

The assumption of Democratic control of Congress last year and the probability that its majority will be increased by this year's elections portends a growing, deeply troubling ideological split within its ranks, already visible, on matters of economic policy generally and regulatory policy specifically - between the more radical (and at the same time reactionary) populists, who label themselves Progressives, and the 20th century liberals, who have dominated in the formulation of their party's economic programs for the last three-quarters century. This paper examines the economic issues on which the two are likely to diverge, defending and proposing policies consistent with historical 18th through 20th century liberalism: • international trade policy, in which the Progressives demonstrate a formidable misinterpretation of our huge trade deficits and insufficient appreciation of the major contribution of retaliatory beggar-my-neighbor policies to intensifying the Great Depression of the 1930's; • threatened recartelization of industries deregulated in the 1970's and 80's - such as the airlines, trucking, and telecommunications; • recourse to wage and price controls rather than monetary policy as a curb on inflation; • recourse to concerted anti-competitive restrictions or rationing rather than market pricing as a remedy for congestion, and • proposed laws imposing network neutrality obligations on providers of access to the Internet. It concludes by proposing remedial policies consistent with the liberal traditions.

Network neutrality is a policy proposal that would regulate how network providers manage and price the use of their networks. Congress has introduced several bills on network neutrality. Proposed legislation generally would mandate that Internet service providers exercise no control over the content that flows over their lines and would bar providers from charging more for preferentially faster access to the Internet. These proposals must be considered carefully in light of the underlying economics. Our basic concern is that most proposals aimed at implementing net neutrality are likely to do more harm than good.

Broadband, or high-speed access to the Internet, has generated significant economic benefits. Certain regulations, however, are slowing investment and deterring entry into the broadband market. In this statement, we make two recommendations that would remedy these regulatory defects and thereby lower artificial barriers to competitive provision of broadband services.

Any belief that a shift from uniform to as-bid pricing would provide power purchasers substantial relief from soaring prices is simply mistaken. The immediate consequence of its introduction would be a radical change in bidding behavior that would introduce new inefficiencies, weaken competition in new generation, and impede expansion of capacity.

Any belief that a shift from uniform to as-bid pricing would provide power purchasers substantial relief from soaring prices is simply mistaken. The immediate consequence of its introduction would be a radical change in bidding behavior that would introduce new inefficiencies, weaken competition in new generation, and impede expansion of capacity.

As we understand it, the D.C. Circuit did not allow the EPA to consider the costs of complying with ozone and PM NAAQS. As we further understand it, this legal ruling can be overturned only by this Court. As economists, we believe that the D.C. Circuit's ruling not allowing the EPA to consider important information relating to the consequences of its regulatory actions is economically unsound. Without delving into the legal aspects of the case, we present below why we think the Court should allow the EPA to consider costs in setting standards. In particular, we believe that, as a general principle, regulators should be allowed to consider explicitly the full consequences of their regulatory decisions. These consequences include the regulation's benefits, costs, and any other relevant factors.

During the course of my previous work in industrial organization and antitrust I published a number of articles in those fields and a book, Fair Competition, The Law and Economics of Antitrust Policy, which I wrote in collaboration with Professor Joel B. Dirlam, and served as a member of both the Attorney General's National Committee to Study the Antitrust Laws, during the Eisenhower Administration, and the National Commission on Antitrust Laws and Procedures, under President Carter. What I plan to do in this brief statement, after repeating the warning I've already given you about my limited professional study in this industry, is to emphasize and briefly explain the two major conclusions that I reached during my service as advisor to the District Court in the Kraft Case, which I spelled out in the testimony I gave at the end of the trial, setting forth my recommended resolution of the antitrust issue. First, I expressed the view that there was a strong basis for public dissatisfaction with the performance of the breakfast cereals industry. But, second, I was in the evidence presented in the case, insofar as I was able to assess it, an insufficient demonstration of the likelihood—or even, indeed, possibility—that the acquisition of Nabisco by Post would further impair the effectiveness of competition in breakfast cereals to justify its reversal under the antitrust laws. Since these two conclusions, expounded in that single piece of testimony, represent in effect the sum total of the message I have to offer this committee I take the liberty of attaching the relevant pages of the transcript of that testimony.

While the regulation of transportation has a legitimate place in history, it became apparent by the decades of the 1960s and 1970s that transportation regulation had suppressed innovation, denied the public a variety of price and quality options, sheltered inefficiency, discouraged intermodalism, and encouraged the wage-price spiral. The author reflects on our experience with deregulation and concludes that deregulation has opened transportation to competition and has produced a striking deconstruction of markets. This new competition has provided numerous benefits to the public including a rate structure in much closer alignment with costs, a greater variety of price and quality options, striking improvements in efficiency, a downward pressure on inflated wages, lower average prices, and an overall improvement in the quality of service. The author concludes that while there is no single cure for the economic problems of the country, preservation and restoration of competition is certainly an important one.

N I939 Professor J. M. Clark demonstrated certain paradoxes in the conception of competition, the implications of which are every year becoming more apparent.' The basic paradox was a simple one: where given markets are in some respects incorrigibly imperfect, an attempt to enforce more perfect competition in other respects may produce a poorer rather than a superior economic performance. Workable competition, in inevitably imperfect situations, may require offsetting imperfections. The most provocative aspect of the A & P case2 is that it involves the kind of paradox envisaged by Clark. A & P was convicted under the antitrust laws because the Department of Justice and the courts inferred an attempt to monopolize, largely from abuses of the company's buying power. Monopsonistic power, employed to produce price discrimination, is clearly incompatible with pure competition. Yet, as certain recent critics of the Department of Justice (notably Professor M. A. Adelman) have in effect argued,3 in the circumstances of the industry, A & P's power and tactics may have produced a better performance than would otherwise have been forthcoming. In short, Clark's "principle of offsetting imperfections" is invoked.4 The requirements of workable competition do not offer a blanket indorsement of all offsetting imperfections or of any particular kind of imperfections at all times and places. If an intelligent public policy should balance the conflicting and offsetting kinds of market

SUMMARY A market economy makes its large allocations and reallocation of resources on the basis of a summing up of the ‘votes’ recorded by customers in a host of small, individual market transactions. A critical task in appraising the efficiency of such an economy, then, is to determine whether and under what conditions this adding up process produces optimal results. The ‘smallness’ of the decisive, individual transactions—their limited size, scope and time-perspective—can, it is argued, be a source of misallocations, in the sense that consumers might disapprove of the larger result thereby produced, if they were ever given the opportunity explicitly to vote for or against it. In certain circumstances, the smallness of the relevant decisions may produce authentic market failure. This will be the case where they do not include an independent appraisal of customers’ desire to keep available for possible future use a service that they do not actually use in sufficient amount to cover the costs of providing it. In other circumstances, the smallness of the individual transactions may encourage irrational consumer choice, because they are too small to justify the effort of securing good market information. In yet others, monopoly elements may cause the buyer to be presented with excessively narrow choices that do not correctly reflect that actual costs of the competing alternatives; and the result may be an uneconomic spiral of product quality changes over time so-called ‘product inflation’. Finally, the cumulation of individual choices may have the ultimate effect of changing consumer preference function themselves, in which event it is not possible for welfare economics to judge the optimality of market performance. These possible defects of the market may be conceived in the more familiar terms—as attributable to externalities, market imperfections or the defects of consumer sovereignty itself. Emphasis on the contribution influence of the smallness of the controlling decisions has the virtue of suggesting the possible necessity of substituting a ‘large’ for a piecemeal accumulation of small decisions if the results are to be intelligently appraised or improved.

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