HOW SHOULD REGULATORS approach the competitive transformation of network industries? The temptation is to “manage” the competitive transition so as to determine the outcome of competition. Thus, paradoxically, the process of deregulation often brings about increased regulatory intervention in the marketplace and correspondingly greater administrative costs and market inefficiencies. The result is neither fish nor fowl, neither a regulated market nor a competitive one. The benefits of competition do not materialize. Partial deregulation distorts economic incentives in a manner that is far worse than traditional rate-of-return regulation or newer forms of incentive regulation. The staffs and budgets of the regulatory agency swell as they undertake the impossible task of managing markets. The problem is akin to privatization in planned economies. Government policymakers must be willing to forsake power and influence over the economy, and to trust what they sometimes view as the “chaos” of the marketplace.

Regulators are concerned with achieving competition “fairly,” yet markets are well known for their efficiency properties, rather than the equity of the outcomes that they produce. Economists may posture as purists and assert that it is misguided for regulators to pursue any goal other than economic efficiency. However correct that position may be as a matter of theory, it does not take the institutional setting of regulation as it really is. Consequently, although economists may consider the definition of “fair competition” to be an oxymoronic undertaking, it is nonetheless necessary to supply regulators with an operational definition of fairness that does not attempt to specify outcomes. They need a set of objectives that does not perpetuate regulation but rather lets regulation recede as competition progresses.