The Effect of Private Interests on Regulated Retail and Wholesale Prices

Abstract

This paper examines how regulators behave in markets when there is a tension between retail competition and cross subsidy. Using retail and wholesale prices from Regional Bell Operating Company territories, and price-cost margins as a proxy for political influence, we find that private interests influence the structure of retail prices, especially favoring rural residential customers. Political influence also extends to wholesale access prices, although the magnitude of its effect is small. Federal high-cost universal service payments to a state do not reduce prices in that state's rural areas, but instead lower urban business prices.

Keywords: competition, political contributions, prices, private interest, regulation, telecommunications, universal service

JEL Classification: L51, L96