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

  • Christian Jaag

    ()

This paper relates to the current discussion about how to measure the net cost and 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. A strong USO invites competition by limiting the USP’s means to position itself in the market and by thereby offering cream-skimming opportunities. 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 and hence may be valuable to the USP despite causing inefficient production. 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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Paper provided by Swiss Economics in its series Working Papers with number 0020.

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Date of creation: Jun 2010
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Handle: RePEc:chc:wpaper:0020
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  1. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, June.
  2. Christian Jaag & Urs Trinkner, 2008. "Tendering Universal Service Obligations in Liberalized Network Industries," Working Papers 0013, Swiss Economics, revised Jan 2009.
  3. 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.
  4. 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.
  5. 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.
  6. Dixit, Avinash, 1979. "The Role of Investment in Entry-Deterrence," The Warwick Economics Research Paper Series (TWERPS) 140, University of Warwick, Department of Economics.
  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. 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.
  9. Christian Jaag, 2007. "Liberalization of the Swiss Letter Market and the Viability of Universal Service Obligations," Working Papers 0006, Swiss Economics.
  10. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
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