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Wednesday, June 06, 2007

Cool paper of the week

An article in the recent issue of the Quarterly Review of Economics and Finance by Paul Zimmerman and Susan Flaherty investigates the impact of monopoly franchises on prison phone rates. Not surprisingly, they find that monopoly pricing is much higher and this imposes an additional burden on the friends and families of the imprisoned as most calls are "collect":
Prisoners incarcerated in state correctional facilities are often limited to making operator-assisted collect calls to their families and associates. Prison phone services are supplied by a single carrier who receives an exclusive service contract through a procurement auction conducted by the state's Department of Corrections (DOC). To win the auction, a firm must offer the highest “kickback” or “site commission” to the DOC, which in turn is passed-on to the recipients of prison collect calls – typically family members – in the form of higher rates. The recipients have little choice but to pay these inflated rates since there is no other alternative for maintaining contact with their incarcerated loved one. Some states have attempted to alleviate the burden of excessive prison collect call rates by changing the methodology used to asses site commissions. The purpose of this study is to empirically evaluate the efficacy of these reforms. The empirical results suggest that the cost of receiving IntraLATA prison collect calls is approximately 41% higher in those states that impose site commissions based as a percentage of the carriers’ ex post revenues relative to those states that impose fixed commissions ex ante. The results are shown to be highly robust with respect to model specification, estimation technique, and control for outliers.

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