For many years scholars and regulators have concerned themselves with the problems of regulating industries with firms engaged in rivalry with one another. The problem goes back at least to the turn of the century with rivalry between railroads and pipelines and is particularly difficult when the rival firms both may operate with economies of scale. Yet surprisingly relatively little economic research has been done to show how such an industry should be structured and how tariffs should be set if economic resources are to be allocated efficiently.

Economist and former regulator Alfred Kahn (1970, p. 71) has described the regulatory dilemma in a number of instances, including the rivalry between or among railroads, the competition between telephone and telegraph services, and the interaction between local distributors of natural gas and electricity. As recently as 1981 he wrote that regulators need help “in devising rules that make reasonable economic sense for the regulation of competition between what appear to be natural monopolies” (p. 67).

Elsewhere I have addressed the nature of economically efficient tariffs when there exists rivalry among multiproduct firms that produce imperfectly substitutable outputs with economies of scale and operate under a viability constraint (Braeutigam, 1984). That paper provides a brief discussion of the economic research on the problem suggested by Kahn and develops a general model of the optimal pricing problem, with any number of firms producing any number of products.