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

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  • Christian Jaag

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Abstract

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.

Suggested Citation

  • Christian Jaag, 2010. "Entry Deterrence and the Calculation of the Net Cost of Universal Service Obligations," Working Papers 0020, Swiss Economics.
  • Handle: RePEc:chc:wpaper:0020
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    References listed on IDEAS

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    1. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn.
    2. Dixit, Avinash, 1980. "The Role of Investment in Entry-Deterrence," Economic Journal, Royal Economic Society, vol. 90(357), pages 95-106, March.
    3. 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 Publishing.
    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. 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.
    6. 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.
    7. 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 Publishing.
    8. Martin J. Osborne & Ariel Rubinstein, 1994. "A Course in Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262650401, January.
    9. 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 Publishing.
    10. Richard Gilbert & Xavier Vives, 1986. "Entry Deterrence and the Free Rider Problem," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 71-83.
    11. 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 Publishing.
    12. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-366, May.
    13. 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 Publishing.
    14. C. Jaag & U. Trinkner & J. Lisle & N. Waghe & E. Van Der Merwe, 2011. "Practical Approaches to USO Costing and Financing," Competition and Regulation in Network Industries, Intersentia, vol. 12(2), pages 108-130, June.
    15. 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 103-125, September.
    16. 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.
    17. Christian Jaag, 2010. "Compensating the Net Cost of Universal Postal Services," Working Papers 0017, Swiss Economics.
    18. 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 141-163, March.
    19. Christian Jaag & Urs Trinkner, 2011. "The interaction between universal service costing and financing in the postal sector: a calibrated approach," Journal of Regulatory Economics, Springer, vol. 39(1), pages 89-110, February.
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    Cited by:

    1. Christian Jaag & Urs Trinkner, 2011. "The interaction between universal service costing and financing in the postal sector: a calibrated approach," Journal of Regulatory Economics, Springer, vol. 39(1), pages 89-110, February.
    2. Christian Jaag & Urs Trinkner & Topias Uotila, 2014. "Regulation and the burden of the net cost resulting from the Universal Service Obligation," Chapters,in: The Role of the Postal and Delivery Sector in a Digital Age, chapter 15, pages 204-213 Edward Elgar Publishing.
    3. Jaag Christian, 2013. "Price Regulation and the Financing of Universal Services in Network Industries," Review of Law & Economics, De Gruyter, vol. 9(1), pages 125-150, September.
    4. Christian Jaag, 2013. "Intellectual Property Rights and the Future of Universal Service Obligations in Communications," Working Papers 0040, Swiss Economics.
    5. Christian Jaag & Urs Trinkner, 2011. "The future of the USO - Economic rationale for universal services and implications for a future-oriented USO," Working Papers 0026, Swiss Economics.
    6. Christian Jaag, 2010. "Compensating the Net Cost of Universal Postal Services," Working Papers 0017, Swiss Economics.
    7. Christian Jaag & Urs Trinkner, 2012. "Defining and financing an intermodal USO," Working Papers 0035, Swiss Economics.

    More about this item

    Keywords

    Universal service obligation; Postal sector; Net cost;

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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