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

  • Jaag Christian

    (Swiss Economics and University of St. Gallen)

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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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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  1. 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.
  2. C. Jaag & U. Trinkner, 2009. "Tendering Universal Service Obligations in Liberalized Network Industries," Competition and Regulation in Network Industries, Intersentia, vol. 10(4), pages 313-333, December.
  3. Valletti, Tommaso M & Hoernig, Steffen & Barros, Pedro P, 2002. "Universal Service and Entry: The Role of Uniform Pricing and Coverage Constraints," Journal of Regulatory Economics, Springer, vol. 21(2), pages 169-90, March.
  4. Harstad, Ronald M & Crew, Michael A, 1999. "Franchise Bidding without Holdups: Utility Regulation with Efficient Pricing and Choice of Provider," Journal of Regulatory Economics, Springer, vol. 15(2), pages 141-63, March.
  5. Martin Buser & Christian Jaag & Urs Trinkner, 2008. "Economics of Post Office Networks: Strategic Issues and the Impact on Mail Demand," Chapters, in: Handbook of Worldwide Postal Reform, chapter 5 Edward Elgar.
  6. Christian Jaag & Martin Koller & Urs Trinkner, 2009. "Calculating the Cost of the Universal Service Obligation: The Need for a Global Approach," Chapters, in: Progress in the Competitive Agenda in the Postal and Delivery Sector, chapter 8 Edward Elgar.
  7. Helmuth Cremer & Philippe De Donder & François Boldron & Bernard Roy, 2008. "Social Costs and Benefits of the Universal Service Obligation in the Postal Market," Chapters, in: Competition and Regulation in the Postal and Delivery Sector, chapter 2 Edward Elgar.
  8. 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.
  9. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
  10. Claire Borsenberger & Helmuth Cremer & Philippe De Donder & Denis Joram & Bernard Roy, 2010. "Funding the cost of universal service in a liberalized postal sector," Chapters, in: Heightening Competition in the Postal and Delivery Sector, chapter 14 Edward Elgar.
  11. Martin J Osborne & Ariel Rubinstein, 2009. "A Course in Game Theory," Levine's Bibliography 814577000000000225, UCLA Department of Economics.
  12. Robert Cohen & Charles McBride & John C. Panzar, 2010. "The cost of the USO in the United States," Chapters, in: Heightening Competition in the Postal and Delivery Sector, chapter 16 Edward Elgar.
  13. Crew, Michael A & Kleindorfer, Paul R, 1998. "Efficient Entry, Monopoly, and the Universal Service Obligation in Postal Service," Journal of Regulatory Economics, Springer, vol. 14(2), pages 103-25, September.
  14. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
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