The role of service quality and capital technology in telecommunication regulation

Successful incentive regulation of telecommunications depends upon price indices that reflect the changes in composition and performance of several key aggregates: aggregates of the telephone services produced by the telephone companies, aggregates of services consumed by particular customer groups and by customers as a whole, and the aggregate of capital goods that comprise the stock of capital used in production. In this paper, we formulate measures of demand for telephone services that can be realized empirically from data routinely reported to the US FCC to incorporate variations in service quality, changes in the mix or composition of services demanded by customers of the telcos, and quite rapid changes in the performances of capital goods. We show how the service quality measures, the switching technology measures, and the capital productivity improvements modify the productivity measures as well as the service demand measures, and how the resulting social optima differ in the RA (regulatory authority) regulatory scheme.