More on “Unbundling”

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The precise definition of “unbundling” is often unclear. Some statutes identify it as “separately identifying and charging” for different services. Other textbooks define it as “making services separately available”. Understanding the concept is crucial to the process of figuring out how to de-integrate a vertically integrated utility:  “Unbundling” competitive functions from noncompetitive functions.

The term is often used without reference to the market structure in which unbundling will occur.  Some market structures allow the incumbent, once it unbundles its monopoly services from its competitive services, to remain in both markets.  In other markets, policymakers have required the utility to sell off its businesses in the now-competitive market and cease providing unbundled services.  Either approach only begins the process of ensuring evenhanded competition post-unbundling, because immature markets are prone to early concentration.  Further, unbundling itself must be accompanied by (a) nondiscriminatory access for competitors to the monopoly service; (b) “cost-unbundling” to ensure that the incumbent’s competitive service costs are not recovered in the monopoly service rates; and (c) enforcement of an arms-length relationship between the incumbent’s competitive and noncompetitive services (if the regulator has allowed the incumbent to engage in both activities).

Unbundling must be accompanied by monitoring.  For if unbundling does not produce a competitive market, the regulator needs to find out why. It could be an economies of scale problem (the services are provided more efficiently as a package), an entry barrier problem (new entrants have a cost disadvantage relative to the incumbent), or a customer inertia problem (customers don’t bother changing suppliers unless there’s a clear advantage to the effort).  Sometimes benefits are possible but long in coming, requiring patience by customers and regulators.  The question is whether policymakers (and consumers) should accept the short-term inconveniences and costs (a loss of static efficiency) to gain a long-term increase in dynamic efficiency (and possibly in static efficiency).