On the design of input prices: Can TELRIC prices ever be optimal?

The optimal design of input prices is analyzed in a simple setting where the regulator has limited knowledge of efficient production costs. Under some conditions, input prices are optimally set equal to expected efficient production costs, as under the Federal Communications Commission’s TELRIC pricing policy in the U.S. telecommunications industry. More generally, input prices optimally reflect, but do not parallel exactly, realized production costs. 2006 Published by Elsevier B.V. JEL classification: L51; L96