Ellig Econ Deregulation In Network Industries Dec 2005

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Ellig Econ Deregulation In Network Industries Dec 2005

  1. 1. Economic Deregulation in Network Industries: The “First Wave” Jerry Ellig Senior Research Fellow [email_address]
  2. 2. Outline <ul><li>Focus on “first wave” of U.S. network industry deregulation (1975-90) </li></ul><ul><li>Economic effects </li></ul><ul><li>Explanations for the effects </li></ul>
  3. 3. Why does this matter? <ul><li>Get the facts straight </li></ul><ul><li>Avoid repeating mistakes </li></ul><ul><li>Understand causation to guide future decisions </li></ul>
  4. 4. Network Industries Local streets Highways Trucks Airports Airways/ air traffic control Airlines Wireline local Wireline long-distance Telecom equipment Local lines/ sidings Trunk lines Trains Local pipes Interstate pipes Gas wells “ Distribution” “ Transmission” “ Production”
  5. 5. Largely Private Ownership (blue) Local streets Highways Trucks Airports Air traffic control Airlines Wireline local Wireline long-distance Telecom equipment Local lines/ sidings Trunk lines Trains Local pipes Interstate pipes Gas wells “ Distribution” “ Transmission” “ Production”
  6. 6. Deregulation of Prices and Entry Govt owned Govt owned 1980 Trucking Govt owned Govt owned 1978 Airlines 1996- ongoing Late 1970s-early 1990s 1970s Wireline Telecom 1976-1980 1976-1980 1976-1980 Rail None Some entry mid-1980s 1978-1993 Gas “ Distribution” “ Transmission” “ Production”
  7. 7. “Open” or “Competitive” Access Govt owned Govt owned N.A. Trucking Govt owned Govt owned N.A. Airlines 1984-today AT&T resale 1984 N.A. Wireline Telecom Mergers 1980-today Mergers 1980-today N.A. Rail State-specific 1983-1992 N.A. Gas “ Distribution” “ Transmission” “ Production”
  8. 8. % 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 years 5 years 2 years
  9. 9. Annual Value of Consumer Benefits ($1995) $4.2 billion $19.6 billion Trucking $7 billion $19.4 billion Airlines N.A. $5 billion Long-Distance Telecom $4.7 billion $9.1 billion Rail N.A. $4-7 billion? Gas Nonprice Total
  10. 10. Hypotheses <ul><li>1. Reduced Market Power: </li></ul><ul><li>Deregulation reduced monopoly prices to competitive levels </li></ul><ul><li>2. Increased Innovation and Entrepreneurship: </li></ul><ul><li>Deregulation led to innovations that reduced costs and created unexpected sources of value for consumers </li></ul>
  11. 11. Gas Price Regulation as a “Windfall Profits” Tax (1968-77) <ul><li>Customers buying cheap gas gained $38.7 billion ($1982) </li></ul><ul><li>Producers lost additional $6.7 billion due to reduced sales </li></ul><ul><li>Customers doing without due to shortage lost $51.7 billion </li></ul>
  12. 12. All Consumers’ Gas Prices Fell
  13. 13. Cost Reductions in Gas Transmission
  14. 14. Gas Innovations <ul><li>Market Hubs/Competition </li></ul><ul><li>($2 billion savings annually) </li></ul><ul><li>Risk Management </li></ul><ul><li>Storage </li></ul>
  15. 15. Rail Rate Reductions
  16. 16. Rail Productivity Improvements
  17. 17. Rail Innovations <ul><li>Shed excess capacity </li></ul><ul><li>Non-union short line and regional railroads </li></ul><ul><li>Unit trains/longer trains </li></ul><ul><li>Intermodal </li></ul><ul><li>Shipper-owned cars </li></ul>
  18. 18. Rail Predictions vs. Actual <ul><li>Pre-deregulation studies estimated deadweight loss of $100 million-$1 billion </li></ul><ul><li>No consensus on rate reductions </li></ul><ul><li>Excess costs estimated at $2.5 billion </li></ul><ul><li>Ex post studies show total benefits of </li></ul><ul><li>$9 billion or more </li></ul>
  19. 19. Long-Distance Telecom Prices
  20. 20. Long-Distance Telecom
  21. 21. Long-Distance Telecom Innovations <ul><li>Fiber optic transmission </li></ul><ul><li>Digital switches </li></ul><ul><li>Total Factor Productivity accelerated after long-distance entry (1969-71) and AT&T divestiture (1984) </li></ul>
  22. 22. Average Airline Fares
  23. 23. Concentrated Hub Fares
  24. 24. Flight Frequency Increased
  25. 25. Airline Innovations <ul><li>Hub-and-spoke systems </li></ul><ul><li>Commuter carriers </li></ul><ul><li>Low-cost carriers </li></ul><ul><li>Bankruptcy to escape high labor costs </li></ul>
  26. 26. Trucking Costs
  27. 27. Trucking Productivity
  28. 28. Trucking Innovations <ul><li>Shipment tracking </li></ul><ul><li>Vehicle monitoring (on-board computers) </li></ul><ul><li>Freight forwarders </li></ul><ul><li>Intermodal </li></ul>
  29. 29. Conclusion <ul><li>“ [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.” </li></ul><ul><li>-- Clifford Winston, 1993 </li></ul>
  30. 30. Caveats <ul><li>Mistakes were made </li></ul><ul><li>Improvement, not perfection </li></ul><ul><li>These examples mostly focus on </li></ul><ul><ul><li>replacing monopoly/cartel with competition, and/or </li></ul></ul><ul><ul><li>removing regulation from a competitive industry </li></ul></ul>
  31. 31. For more information … <ul><li>Robert Crandall and Jerry Ellig </li></ul><ul><li>Economic Deregulation and Customer Choice (1997) </li></ul><ul><li>available at </li></ul><ul><li>www.mercatus.org/regulatorystudies/article.php/839.html </li></ul>

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