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Price Regulation and the Financing of Universal Services in Network Industries

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  • Christian Jaag

Abstract

The financing of universal service in network industries has traditionally relied on granting the universal service provider (USP) a reserved area. Liberalization policies promoting competitive entry put the traditional universal service at risk. Consequently, there is an increased interest in knowing the cost of the universal service obligation (USO) and an intensive policy debate about its financing. This paper explores the complementary roles of price regulation and universal service regulation in network industries. It analyzes compensation for the universal service provider by public finances and a USO fund. As long as the USP enjoys market power, also price regulation may serve as a means to finance universal services. This implies allowing for price increases to compensate for the net cost of the USO. It releases competing operators or the general budget from contributing to the financing of the USO but results in distorted pricing and reduced overall welfare due to inefficient entry. Generally, the analysis shows that current practices of costing and financing universal services may result in unintended market distortions. The paper quantifies these effects and demonstrates how such distortions can be avoided.

Suggested Citation

  • Christian Jaag, 2013. "Price Regulation and the Financing of Universal Services in Network Industries," Working Papers 0039, Swiss Economics.
    • Handle: RePEc:chc:wpaper:0039
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    5. Christian Jaag & Helmut Dietl, 2011. "Postal and Regulatory Reform in Intermodal Competition," Working Papers 0031, Swiss Economics.
    6. Jaag Christian, 2011. "What is an Unfair Burden? Compensating the Net Cost of Universal Service Provision," Review of Network Economics, De Gruyter, vol. 10(3), pages 1-32, September.
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    10. Christian Jaag, 2007. "Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 143(III), pages 261-282, September.
    11. C. Jaag & U. Trinkner & J. Lisle & N. Waghe & E. Van Der Merwe, 2011. "Practical Approaches to USO Costing and Financing," Competition and Regulation in Network Industries, Intersentia, vol. 12(2), pages 108-130, June.
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    13. Jaag Christian, 2011. "Entry Deterrence and the Calculation of the Net Cost of Universal Service Obligations," Review of Network Economics, De Gruyter, vol. 10(1), pages 1-19, March.
    14. Armstrong Mark, 2008. "Access Pricing, Bypass and Universal Service in Post," Review of Network Economics, De Gruyter, vol. 7(2), pages 1-16, June.
    15. Michael A. Crew & Paul R. Kleindorfer (ed.), 2009. "Progress in the Competitive Agenda in the Postal and Delivery Sector," Books, Edward Elgar Publishing, number 13248.
    16. Beat Friedli & Christian Jaag & Daniel Kraehenbuehl & Ole Bach Nielsen & S?ren-Michael Pihl & Urs Trinkner, 2006. "Consumer preferences and last mile pricing in the postal sector," Working Papers 0004, Swiss Economics, revised Jul 2006.
    17. Panzar, John C., 2000. "A methodology for measuring the costs of universal service obligations," Information Economics and Policy, Elsevier, vol. 12(3), pages 211-220, September.
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    19. 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.
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    Cited by:

    1. Christian Jaag & Martin Maegli, 2015. "Market Regulations and USO in the Revised Swiss Postal Act: Provisions and Authorities," Topics in Regulatory Economics and Policy, in: Michael A. Crew & Timothy J. Brennan (ed.), Postal and Delivery Innovation in the Digital Economy, edition 127, pages 301-311, Springer.
    2. Urs Trinkner & Christian Jaag & Andreas Haller, 2019. "Funding Universal Services: Cross-subsidization and Net cost balancing," Working Papers 0064, Swiss Economics.
    3. Haller Andreas & Christian Jaag & Urs Trinkner, 2014. "USO cost allocation rules and welfare," Working Papers 0049, Swiss Economics.

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    More about this item

    Keywords

    Universal service obligation; Postal sector; Net cost; Price regulation;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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