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Universal service obligations: The role of subsidization schemes

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

Abstract

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.

Suggested Citation

  • Mirabel, F. & Poudou, J.-C. & Roland, M., 2009. "Universal service obligations: The role of subsidization schemes," Information Economics and Policy, Elsevier, vol. 21(1), pages 1-9, February.
  • Handle: RePEc:eee:iepoli:v:21:y:2009:i:1:p:1-9
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    References listed on IDEAS

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    1. 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.
    2. Ilie, Laura & Losada, Ramiro, 2004. "Endogenous financing of the universal service," UC3M Working papers. Economics we044116, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Mark Armstrong, 2001. "Access Pricing, Bypass, and Universal Service," American Economic Review, American Economic Association, vol. 91(2), pages 297-301, May.
    4. 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 169-190, March.
    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, March.
    6. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2000. "Universal service obligations and competition," Information Economics and Policy, Elsevier, vol. 12(3), pages 249-259, September.
    7. 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.
    8. 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.
    9. 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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    Citations

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    Cited by:

    1. Gautier, Axel & Wauthy, Xavier, 2012. "Competitively neutral universal service obligations," Information Economics and Policy, Elsevier, vol. 24(3), pages 254-261.
    2. Willington, Manuel & Li Ning, Jorge, 2014. "Regulating a monopoly with universal service obligations: The role of flexible tariff schemes," Telecommunications Policy, Elsevier, vol. 38(1), pages 32-48.
    3. Berg, Sanford V. & Jiang, Liangliang & Lin, Chen, 2011. "Incentives for cost shifting and misreporting: US rural universal service subsidies, 1991–2002," Information Economics and Policy, Elsevier, vol. 23(3), pages 287-295.
    4. Gautier Axel & Paolini Dimitri, 2011. "Universal Service Financing in Competitive Postal Markets: One Size Does Not Fit All," Review of Network Economics, De Gruyter, vol. 10(3), pages 1-30, September.
    5. Axel Gautier & Xavier Wauthy, 2010. "Price competition under universal service obligations," International Journal of Economic Theory, The International Society for Economic Theory, vol. 6(3), pages 311-326.
    6. Joan Calzada & Xavier Fageda, 2012. "Discounts and Public Service Obligations in the Airline Market: Lessons from Spain," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(4), pages 291-312, June.
    7. Poudou Jean-Christophe & Roland Michel & Thomas Lionel, 2009. "Universal Service Obligations and Competition with Asymmetric Information," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-25, October.

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