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Cross-Subsidization in Telecommunications: Beyond the Universal Service Fairy Tale

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  • Kaserman, David L
  • Mayo, John W
  • Flynn, Joseph E

Abstract

For many years, regulatory policy in the telecommunications industry has been strongly influenced by the belief that the traditional system of cross-subsidizing local rates by long distance has served to promote the goal of universal service. In this paper, we examine both the theoretical and empirical support for this widely accepted relationship and find it wanting in each. The results indicate that the cross-subsidization mechanism bears no causal relationship to the policy goal of universal service. Instead, both the subsidy levels and subscription rates appear to be determined by other economic variables, such as those suggested by the economic theory of regulation. Copyright 1990 by Kluwer Academic Publishers

Suggested Citation

  • Kaserman, David L & Mayo, John W & Flynn, Joseph E, 1990. "Cross-Subsidization in Telecommunications: Beyond the Universal Service Fairy Tale," Journal of Regulatory Economics, Springer, vol. 2(3), pages 231-249, September.
  • Handle: RePEc:kap:regeco:v:2:y:1990:i:3:p:231-49
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ward, Michael R., . "Rural Telecommunications Subsidies Do Not Help," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association.
    2. 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.
    3. Biancini, Sara, 2011. "Behind the scenes of the telecommunications miracle: An empirical analysis of the Indian market," Telecommunications Policy, Elsevier, vol. 35(3), pages 238-249, April.
    4. Kaserman, David L. & Mayo, John W., 1999. "Regulatory policies toward local exchange companies under emerging competition: guardrails or speed bumps on the information highway?," Information Economics and Policy, Elsevier, vol. 11(4), pages 367-388, December.
    5. Gregory L. Rosston & Scott J. Savage & Bradley S. Wimmer, 2006. "The Impact of "Deregulation" on Regulator Behavior: An Empirical Analysis of the Telecommunications Act of 1996," Discussion Papers 05-006, Stanford Institute for Economic Policy Research.
    6. David Kaserman & John Mayo & Larry Blank & Simran Kahai, 1999. "Open Entry and Local Telephone Rates: The Economics of IntraLATA Toll Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 14(4), pages 303-319, June.
    7. Garbacz, Christopher & Thompson, Herbert Jr., 2005. "Universal telecommunication service: A world perspective," Information Economics and Policy, Elsevier, vol. 17(4), pages 495-512, October.
    8. Eriksson, Ross C & Kaserman, David L & Mayo, John W, 1998. "Targeted and Untargeted Subsidy Schemes: Evidence from Postdivestiture Efforts to Promote Universal Telephone Service," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 477-502, October.
    9. Dino Falaschetti, 2003. "Can latent groups influence policy decisions? The case of telecommunications policy," Public Economics 0311002, EconWPA.
    10. Gregory L. Rosston & Scott J. Savage & Bradley S. Wimmer, 2008. "The Effect of Private Interests on Regulated Retail and Wholesale Prices," Journal of Law and Economics, University of Chicago Press, vol. 51(3), pages 479-501, August.
    11. Gregory L. Rosston & Scott J. Savage & Bradley S. Wimmer, 2013. "Effect of Network Unbundling on Retail Prices: Evidence from the Telecommunications Act of 1996," Journal of Law and Economics, University of Chicago Press, vol. 56(2), pages 487-519.
    12. Wimmer, Bradley S. & Rosston, Gregory L., 2005. "Local telephone rate structures: before and after the Act," Information Economics and Policy, Elsevier, vol. 17(1), pages 13-34, January.
    13. Gideon, Carolyn, 2012. "The phoneless in the broadband age: A pilot study in Massachusetts," Telecommunications Policy, Elsevier, vol. 36(9), pages 704-723.
    14. Francis Su, "undated". "Rental Harmony: Sperner's Lemma in Fair Division," Claremont Colleges Working Papers 1999-10, Claremont Colleges.
    15. Jeffrey Macher & John Mayo, 2012. "The World of Regulatory Influence," Journal of Regulatory Economics, Springer, vol. 41(1), pages 59-79, February.
    16. Parsons, Steve G. & Ward, Michael R., 1996. "The influence of regulation on marginal factor cost: Access markets in U.S. telecommunications," Information Economics and Policy, Elsevier, vol. 8(2), pages 95-106, June.
    17. Dreze, Jacques & Le Breton, Michel & Savvateev, Alexei & Weber, Shlomo, 2006. "0.19% Subsidy-Free Spatial Pricing," IDEI Working Papers 423, Institut d'Économie Industrielle (IDEI), Toulouse.
    18. Mark L. Burton & David L. Kaserman & John W. Mayo, 2009. "Common Costs And Cross-Subsidies: Misestimation Versus Misallocation," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 193-199, April.

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