State utility commissions typically regulate local phone companies and the rates

Question

State utility commissions typically regulate local phone companies and the rates they can charge, but local phone companies also offer long-distance service to their customers. Rival long-distance carriers also connect to local phone lines to provide long-distance service to customers.

Assume the state utility commission restricts the price of local phone calls to be below what would prevail in a free market.

True or False: There is likely no unrealized profit in the market for local phone calls.

True

False

Recently, local phone companies have changed their service offerings. The local phone companies now require customers to purchase long-distance phone service in addition to local phone service at the regulated rates.

This practice is known as___ .

Explanation / Answer

(1) False

The price prevailing in a free market is the marginal cost. But if the phone companies can charge a price that is higher than average total cost, there will be a profit.

(2) This practice is known as Tying (or Bundling).

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