PRICES OF NETWORK SERVICES UNDER THE CONDITIONS OF MONOPOLY, MARKET LIBERALIZATION AND THEIR REGULATION

Abstract

The provision of network services which are often associated with natural monopoly has led to the process of price discrimination of consumers. It pursues the appropriation of a larger part of the consumer surplus. The proposal to introduce two-part tariffs: network access fee and price per amount consumed, is a disguised approach to get higher profits from network services provision. It preserves the pricing model in which P > МС (prices are higher than the marginal cost). W. Baumol taking into account the characteristics of the supply average total cost (ATC) curve of natural monopolies suggested that the prices of network services should be formed according to the average cost (rule P = AC). This was a second good decision because prices were still higher than the marginal cost (P > МС). In this respect the state regulators applied two classical approaches to regulate their prices: cost plus a normative profit rate and price limit. The market liberalization and ecological restrictions made the state regulators adopt a network services pricing model with several components. They reported more precisely the expenses of participants in the network services provision (producers, distributors, operators-dealers), which is an improvement of the second good outcome: P = AC, but still P > МС. Competition which imposes market liberalizations drives prices to marginal cost: Р = МС, or the first best outcome. The monopolistic and oligopolistic activities of those participating in the process of network services provision impede its achievement, which necessitates additional control on their market behaviour.