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Universal service obligations: The role of subsidization schemes

  • Mirabel, F.
  • Poudou, J.-C.
  • Roland, M.

A universal service obligation (USO) that imposes ubiquity and uniform pricing constraints generally creates strategic links among markets served by the universal service provider (USP). In this paper, we show that adding a unit subsidy in the compensation scheme of a USO helps to counteract the inefficiencies that result from these strategic links. Welfare obtained under different implementations of the USO depends on whether use of the unit subsidy is limited or not. In this respect, franchise bidding for the USO, where firms submit bids for lump-sum subsidies, is welfare-dominated by the exogenous choice of the USP and by pay-or-play regulation. Similarly, the second-best allocation can be attained through the endogenous choice of the USP's geographic area of monopoly, provided the unit subsidy instrument is available.

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Article provided by Elsevier in its journal Information Economics and Policy.

Volume (Year): 21 (2009)
Issue (Month): 1 (February)
Pages: 1-9

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Handle: RePEc:eee:iepoli:v:21:y:2009:i:1:p:1-9
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505549

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  1. 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.
  2. Steffen H. Hoernig & Tommaso M. Valletti, 2002. "The Interplay Between Regulation and Competitions: The Case of Universal Service Obligations," CESifo Working Paper Series 682, CESifo Group Munich.
  3. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2002. "Allocating and funding universal service obligations in a competitive market," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1247-1276, November.
  4. Mark Armstrong, 2001. "Access Pricing, Bypass, and Universal Service," American Economic Review, American Economic Association, vol. 91(2), pages 297-301, May.
  5. H. Cremer & F. Gasmi & A. Grimaud & J. J. Laffont, 2001. "Universal Service: An economic perspective," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 72(1), pages 5-43, 03.
  6. repec:mop:credwp:03.11.41 is not listed on IDEAS
  7. Mirabel, Francois & Poudou, Jean-Christophe, 2004. "Mechanisms of funding for Universal Service Obligations: the electricity case," Energy Economics, Elsevier, vol. 26(5), pages 801-823, September.
  8. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2000. "Universal service obligations and competition," Information Economics and Policy, Elsevier, vol. 12(3), pages 249-259, September.
  9. Laura Ilie & Ramiro Losada, 2004. "Endogenous Financing Of The Universal Service," Economics Working Papers we044116, Universidad Carlos III, Departamento de Economía.
  10. Anton, James J. & Vander Weide, James H. & Vettas, Nikolaos, 2002. "Entry auctions and strategic behavior under cross-market price constraints," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 611-629, May.
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