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Importance of Cost-Oriented Pricing for Sustainable Market Expansion

Learn why cost-oriented pricing is crucial for consumer access to services, efficient network access for competitors and service providers, and sustainable market expansion. Explore economic cost, professional approaches to cost analysis, and the problem of monopoly power. Discover U.S. experience with public utility regulation and the relevance of simpler cost benchmarks. Benchmarking prices and costs can lead to efficient pricing and require regulatory intervention when necessary.

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Importance of Cost-Oriented Pricing for Sustainable Market Expansion

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Presentation Transcript

  1. Why is cost oriented pricing important • Consumer Access to Services • Efficient Network Access for Competitors and Service Providers • Sustainable Market Expansion • Efficient Allocation of Economic Resources

  2. What is included in economic cost? • Opportunity Cost Concept • Payments/Obligations to Attract All Necessary Resources • People – Labour, Management and Technical Skills • Facilities and Technologies • Investment Capital • Profit – Cost of Attracting Equity Capital

  3. Professional approaches to cost analysis • Accounting – Actual Revenues & Expenditures; Financial Statements • Engineering – Efficient Network Design • Economics – Efficient Allocation of Economic Resources • They Often Disagree over Cost Concepts, Data Sources and Study Methods

  4. Economic reference point: Competitive Market Theory • Many Competitors – Supply & Demand Determine Market Prices • Competitors Must Reduce Costs to the Market Price to Prosper • All Competitors Can Not Set Prices Based on Their Costs • Market Prices Reflect the Costs of the Most Efficient Competitor

  5. The problem of monopoly power • Prices Remain Above Cost – Sometimes by Large Margins • Competition is Not Effective in Reducing Prices or Costs • Can Price Regulation Help? • Why Not Regulate Prices on the Basis of Costs?

  6. U.S. experience: Public Utility Regulation • Prices Set on Actual Accounting Cost, including Reasonable Profits • Achieved Significant Coverage of Population • Potential Competition Mostly Resisted and Restricted • Created a Cost-plus Incentive to Inefficiency • Cost-based Pricing Became Price-based Costing • The Cost of Costing Became Very High: Continuing Disputes • Created New Markets for Lawyers, Economists, Accountants, Engineers

  7. Experience with network interconnection costing • U.S.: Pre and Post FCC “TELRIC” • Europe and Elsewhere: 57 Varieties of LRAIC • Modelling and Precision as an Excuse for Delay • Relevance to Developing Countries?

  8. Moving to simpler cost benchmarks • Precision Misleading in Dynamic Markets with Technological Change • The Practical Objective: Continuous Improvement • Simplified Cost Models More Appropriate • Benchmark Comparisons Can be Effective • Standard Costs Can Be Reference Points

  9. Benchmarking prices as well as costs • The Goal is Efficient Prices • Benchmark Prices, Costs and Margins • Linking Common Service Elements: Competitive and Monopoly • Published International Comparisons: “Naming & Shaming” • Specifying Indicator Measures Requiring Regulatory Intervention

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