REJOINDER TO TISATO ON “THE ECONOMICS OF THE BEAZLEY TELECOMMUNICATIONS

REFORM PROPOSAL”

by MALCOLM COOK and BRIAN DOLLERY *

In an interesting and informative response to our paper on the Beazley telecommunications reform proposal (Cook and Dollery, 1990), Peter Tisato (1991) both criticises and extends our analysis. In essence, Tisato (1991) objects to our central conclusion that “. . . it is difficult to maintain that the Beazley package will be welfare-reducing relative to the status quo” (Cook and Dollery, 1990, p. 69), and argues instead that “. . . this strong conclusion may not hold in certain circumstances” (Tisato, 1991, p. 89).

In support of this claim Tisato (1991) employs three efficiency criteria in evaluating a Beazley duopoly outcome relative to a monopoly status quo; namely productive or x-efficiency, allocative efficiency, and the question of economies of scale. These three criteria are brought to bear on two conceptually plausible scenarios. Firstly, where an initial monopoly position is characterised by natural monopoly, and the existence of a natural monopoly necessarily implies the lowest possible production costs by definition (Baumol, Bailey, and Willig, 1977). In these circumstances, the introduction of competition will improve both productive and allocative efficiency but at the cost of forgone economies of scale. Without reference to the actual empirical magnitudes involved, it is thus not possible to conclude that competition will be unambiguously welfare-enhancing.

Secondly, Tisato (1991) examines an equivalent policy-induced degree of competition, but this time assumes “. . . that the telecommunications sector was not a natural monopoly; that is, economies of scale do not exist” (Tisato, 1991, p. 90). Under these circumstances, a move from monopoly to duopoly will improve both allocative and productive efficiency in the industry with no countervailing forgone economies of scale. Consequently, it can be concluded on a priori theoretical grounds alone that the introduction of competition will be unambiguously welfare-enhancing.

On the basis of these two analytical scenarios, Tisato (1991) argues that if the telecommunications industry in Australia is indeed characterised by natural monopoly, then our favourable view of the Beazley reform package is unwarranted. Alternatively, if an initial presumption of natural monopoly is empirically untenable, then “Cook and Dollery’s conclusion would seem to be more valid” (Tisato, 1991, p. 90). We entirely agree.

* Department of Economics, University of New England.

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In our earlier paper we were at pains to point out the considerable uncertainty surrounding the issue of whether the Australian telecommuni- cations industry was, in fact, a natural monopoly. For instance, we noted inter aha, “the question of whether or not the present telecommunications industry in Australia or elsewhere is indeed a natural monopoly can (in principle at least) only be settled empirically” (Cook and Dollery, 1990, p. 65). Moreover, in our application of various oligopoly models to an idealised version of the Beazley reform proposals, we explicitly acknowledged the use of constant returns to scale rather than increasing returns to scale. Consider the following extract (Cook and Dollery, 1990, p. 68):

Given uncertainty as to the real nature of cost structures in the telecommunications industry we abstract from cost in the determination of the various levels of equilibrium output and price. Althought this in effect amounts to assuming constant returns to scale, it does not distort outcomes ranked ordinally. And since our general conclusion that “it is difficult to maintain that the

Beazley reform package will be welfare-reducing relative to the status quo” (Cook and Dollery, 1990, p. 69) flows directly from the application of simple oligopoly models under constant returns to scale, we do not agree with Tisato (1991) that it applies also to instances of natural monopoly. However, we concur that the introduction of complications such as a multiproduct industry or two-tier pricing schemes would have improved the analysis of the Beazley telecommunications reform proposals.

REFERENCES Baumol, W.J.. Bailey, E.E. and Willig, R.D. (1977), “Weak Invisible Hand Theorems on the

Sustainability of Multiproduct Natural Monopoly”. American Economic Review, Vol. 67(1).

Cook, M.G. and Dollery, RE. (1990). “The Economics of the Beazley Telecommunications Reform

Tisato, P. (1991). “Reply to Article by M. Cook and B. Dollery. “The Economics of the Beazley

pp. 350-365.

Proposals’*, Economic Papers, Vol. 9(4], pp. 61-70.

’Mecommunications Reform Proposal”, Economic Papers, Vol. lO(1). pp. 89-91.

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