Dynamics, Efficiency and Network Industries: A Special Issue of the Review of Network Economics (Introduction and Overview)

The primary purpose of this special issue of the Review of Network Economics is to address issues related to the dynamics of firm behavior and efficiency in network industries. A secondary purpose, where relevant, is to analyze the relationship between the nature of the regulatory regime and the performance over time of the firms subject to that regime. Topics include: the evolution of price-cost margins, the incentives to undertake investment, innovation and the implications for productivity growth, the dynamics of firm interaction and strategic behavior, and the development and effectiveness of regulatory regimes. Network industries are so-named because they typically require the utilization of a network or infrastructure capital to deliver their (retail) services. The most obvious examples include: electricity, natural gas, railways, telecommunications, video programming (such as satellite and cable television), but others involve components of the transportation sector, such as airfields and seaports, as well as waterways, pipelines and aspects of financial intermediation, such as check-clearing networks. The papers in this special issue address a cross section of network industries, including telecommunications, electricity, video programming, and airlines. In addition, the papers are methodologically diverse by design, ranging from analytical/theoretical to empirical/econometric to industry surveys. The general topic of dynamic efficiency within network industries is an important area of research for a number of reasons. First, the long run competitive pricing standard is generally not the sole objective of regulatory authorities. Typically, the regulator strives to balance the public policy goals of encouraging static efficiency (which includes optimally relating prices to marginal costs) and promoting dynamic efficiency, which in part concerns optimal cost-reducing and product development activities. An example of this balancing act is the following. A firm’s incentive to invest in infrastructure is a function of the returns that it expects from this investment relative to other forms of capital accumulation. Hence, regulatory constraints that serve to constrict price-cost margins (to improve static efficiency) may be expected to reduce the returns that a regulated firm could expect from its infrastructure investment, and thereby weaken incentives to improve dynamic efficiency, holding all other factors constant. Conversely, a regulated firm facing pressure on its price-cost margins could be driven to expand infrastructure capital, thereby improving dynamic efficiency to sustain profitability. Also, in a vertically integrated industry context, regulating low access prices