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Entry Deterrence and the Calculation of the Net Cost of Universal Service Obligations

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  • Jaag Christian

    (Swiss Economics and University of St. Gallen)

Abstract

This paper relates to the current discussion about how to measure the net cost and the unfair burden of universal service provision in network industries. The established profitability cost approach compares the profit of a universal service provider (USP) with and without a universal service obligation (USO). This paper argues that the net cost of universal service provision critically depends on the regulatory counterfactual and hence the USP’s strategy space without USO. On the one hand, a strong USO limits the USP’s means to position itself in the market, which offers cream-skimming opportunities and invites competition. On the other hand, a simple game-theoretic entry analysis shows that the USO may effectively serve as a valuable strategic commitment device to deter entry. Hence, the USO may be valuable to the USP despite causing inefficient operations. From a policy perspective, this constitutes a counter-intuitive result for the definition of the USO: the stricter it is regulated, the more detrimental it may be to competition and, therefore, the smaller is its burden on the USP.

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File URL: http://www.degruyter.com/view/j/rne.2011.10.1/rne.2011.10.1.1189/rne.2011.10.1.1189.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal Review of Network Economics.

Volume (Year): 10 (2011)
Issue (Month): 1 (March)
Pages: 1-19

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Handle: RePEc:bpj:rneart:v:10:y:2011:i:1:n:4

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Cited by:
  1. Christian Jaag, 2013. "Price Regulation and the Financing of Universal Services in Network Industries," Working Papers 0039, Swiss Economics.
  2. Christian Jaag & Urs Trinkner, 2011. "The interaction between universal service costing and financing in the postal sector: a calibrated approach," Journal of Regulatory Economics, Springer, vol. 39(1), pages 89-110, February.
  3. Christian Jaag, 2013. "Intellectual Property Rights and the Future of Universal Service Obligations in Communications," Working Papers 0040, Swiss Economics.
  4. Christian Jaag, 2010. "Compensating the Net Cost of Universal Postal Services," Working Papers 0017, Swiss Economics.
  5. Christian Jaag & Urs Trinkner, 2011. "The future of the USO - Economic rationale for universal services and implications for a future-oriented USO," Working Papers 0026, Swiss Economics.

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