Links to this page were:
Section Subnavigation Links:
Appendix I: Glossary
- Allocative Efficiency:
- Allocative efficiency is the extent to which the economy's finite resources are deployed in a fashion so as to derive maximum benefit. An important condition is that prices reflect underlying costs.
-
- Average Incremental Cost:
- The difference in the firm's total costs with and without service X supplied, divided by the output of X. In other words, it is the cost per unit of X that is added to the firm's total outlays as a result of its supply of the current output of X.[151]
-
- Avoidable Cost:
- Cost which can be avoided by not providing a particular service. It may be seen as a further approach to estimating incremental cost.
-
- BW (Baumol-Willig) Rule:
- The rule is also known as the Efficient Component Pricing Rule (ECPR) and Parity Principle. A rule for determining interconnection prices, under which the price is composed of the incremental costs of providing the interconnection service plus the profit (including contribution to common costs) that the network operator foregoes by selling interconnection rather than the final service which is served by interconnection.
-
- Bill and Keep:
- A reciprocal pricing rule (see reciprocity below) under which two 'two-way' networks agree to carry traffic from each others network at no charge. (Each network bills the traffic at its originating point and keeps the revenue).
-
- Bottleneck Facilities:
- (also known as essential facilities) As used here, the term does not have a precise legal meaning, as in some US Court cases, but refers to facilities which a competitor must have access to in order to compete in an activity with the operator of the facility.
-
- Capacity Pricing:
- A method of regulating the prices of a monopolist which explicitly seeks to ration the limited capacity of the regulated firm. These include the so-called 'peak-load' pricing models which allocate the common costs of the firm most heavily in the peak period.
-
- Common Costs:
- Often the term is used interchangeably with 'Joint Costs'. Costs that are incurred in the supply of all or a group of services provided by the firm and cannot be directly attributed to any one service. Common costs arise from the existence of economies of scope.
-
- Complement:
- good X is a complement for good Y if demand for good X rises when the price of good Y falls.
-
- Contestable market:
- A market is said to be perfectly contestable if the entry and exit are perfectly easy and costless. Baumol was one of the principle authors of the theory.[152] Particularly important is that for a market to be perfectly contestable, it is not necessary for instantaneous entry to be possible. The same consequences can be achieve, according to Baumol, by contracts between the entrant and the incumbent's former customers.
-
- Cournot Game:
- A form of strategic interaction between a small number of participants in a market all of whom produce an identical product. Each participant chooses the quantity of the product to produce assuming that the other participants will not respond directly to changes in the original firms production. The market price is determined by the total amount of the product produced for the market.
-
- Demand Function:
- A function that specifies for each price, a quantity of a particular good or service that is consumed. A demand function is linear an increase in price of $1 results in the same decrease in quantity consumed, whatever the starting price.
-
- Double Marginalisation:
- Where there are two successive stages of production each with imperfect competition, each stage adds a mark-up over cost. The decisions of the downstream stage do not take into account the effect on profit in the upstream stage, leading to excessive contraction of demand. Vertical integration can eliminate the double marginalisation, resulting in both higher profits and lower prices.
-
- Dynamic Efficiency:
- Achieving an efficient allocation of resources over time, particularly through innovation and the exploiting new opportunities as they arise.
-
- Economies of Scale:
- These are present where the unit cost falls as the level of output rises.
-
- Economies of Scope:
- These are present where the unit cost of a service is lower because the firm also provides other services, i.e. the provision of service B reduces the unit cost of supplying service A.
-
- Elasticities:
- The price elasticity of demand gives the percentage change in demand for a service that would result from a given percentage change in its price. The cross-price elasticity of demand gives the percentage change in demand for one service that would result from a given percentage change in the price of another service.
-
- Externality:
- An externality is an effect on a party of any transaction between two parties, for which the party is not compensated.
-
- Forward Looking Costs:
- An assessment of costs on the basis that any costs which arise from past decisions should be ignored when calculating the profitability of current and future decision. As well as future operational costs, the costs of maintaining and replacing assets are included.
-
- Fully Distributed Costs:
- An accounting approach under which all the costs of the firm are distributed between its various services. The fully distributed costs of a service may therefore include some common costs that are not directly attributable to the service.
-
- Incremental Costs:
- The costs that arise as a result of the provision of the "increment". In this document, the increment refers to a service. In contrast to fully distributed costs, the incremental costs of a service include only those costs that are directly caused by the provision of the service. So long as service revenue exceeds incremental costs, the firm improves its profitability by providing the service.
-
- Influence Activities:
- Activities that seek to change the distribution of economic 'rents'. Examples include lobbying. See for example, Milgrom and Roberts (1992).
-
- Long Run Average Incremental Cost:
- The Average Incremental Cost of providing a service when all of the factors of production are variable. No clear definition of the appropriate period exists, but Attenborough (1994) suggests variously 5-10 years to take account of time for network capacity to adjust to meet demand, and a period long enough for all costs to be avoidable.
-
- Marginal Cost:
- The cost of supplying an extra unit of output.
-
- Natural Monopoly:
- A market is a natural monopoly when one firm can supply the entire market demand at a lower cost than two or more firms. Such a market cannot support competition.
-
- Network Externality:
- An externality is an effect on a third party of a transaction between two parties, for which the third party is not compensated. Thus in telecommunications, the network externality involves an individual consumer's demand for use of the network increasing with the number of other users on the network. Thus, if the entrant brings in some new customers, it can to some degree stimulate demand for the incumbent's services, justifying the incumbent charging a lower price for interconnection than if the effect was ignored.[153]
-
- Opportunity costs:
- The return that is foregone by employing resources in their current use rather than the most valuable alternative use.
-
- Productive Efficiency:
- This is maximised when each firm in the industry carries out its activities at minimum cost and when activities are distributed between firms such that industry-wide costs are minimised.
-
- Ramsey Prices:
- The set of retail prices for calls and exchange line rentals that maximise allocative efficiency, when the presence of economies of scale and scope make prices equal to marginal cost unprofitable. The Ramsey price for a service with a low elasticity of demand has a larger mark-up over marginal cost than a service whose demand is more elastic. Mark-ups therefore reflect the relative willingness to pay of consumers and the distortion from the pattern of consumption at marginal cost prices is minimised.
-
- Reciprocity:
- A rule for pricing interconnection between two 'two-way' networks under which each the charges are the same (or 'reciprocal') for traffic in each direction.
-
- Revenue Capping Rules:
- A method of regulating the prices of a monopolist which controls not the prices themselves, but the overall revenue that the firm can earn. See for example Ralph (1995) and Laffont and Tirole (1995).
-
- Stand-Alone Cost:
- the cost of producing one product line on its own, using current best, forward looking technology.
-
- Substitute:
- good X is a substitute for good Y if demand for good X rises when the price of good Y rises.
-
- Transactions Costs:
- Any barrier, obstacle or impediment to the timely, successful and efficient conclusion of negotiations and transactions. Examples include the time and cost of negotiating, uncertainty over property rights and strategic negotiating behaviour such as strikes and hold outs.
-
- Two-Part Pricing:
- A method of regulating the prices of a monopolist in which the monopolist is permitted to charge both a fixed fee and a variable, or usage fee. If the fixed fee can recover the common costs of the firm the fully-efficient outcome can be achieved by setting the variable fee equal to marginal cost.
-
- Variable Proportions:
- When one input can be substituted for another in the production of a certain quantity of output. The opposite is 'fixed proportions'. If one of the inputs is produced in an upstream monopoly the resulting mark-up over cost causes an inefficient distortion away from that input in the downstream stage. This inefficiency can be eliminated by vertical integration.
-
- Vertical Integration:
- A firm is vertically-integrated when it owns or controls a firm in an upstream or downstream market. For example, a coal-fired power station which owns a coal mine is vertically-integrated.
Back to Top