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Price Regulation and the Financing of Universal Services in Network Industries

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  • Christian Jaag

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Abstract

The financing of universal service in network industries has traditionally relied on granting the universal service provider (USP) a reserved area. Liberalization policies promoting competitive entry put the traditional universal service at risk. Consequently, there is an increased interest in knowing the cost of the universal service obligation (USO) and an intensive policy debate about its financing. This paper explores the complementary roles of price regulation and universal service regulation in network industries. It analyzes compensation for the universal service provider by public finances and a USO fund. As long as the USP enjoys market power, also price regulation may serve as a means to finance universal services. This implies allowing for price increases to compensate for the net cost of the USO. It releases competing operators or the general budget from contributing to the financing of the USO but results in distorted pricing and reduced overall welfare due to inefficient entry. Generally, the analysis shows that current practices of costing and financing universal services may result in unintended market distortions. The paper quantifies these effects and demonstrates how such distortions can be avoided.

Suggested Citation

  • Christian Jaag, 2013. "Price Regulation and the Financing of Universal Services in Network Industries," Working Papers 0039, Swiss Economics.
  • Handle: RePEc:chc:wpaper:0039
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    References listed on IDEAS

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    1. De Villemeur Etienne Billette & Cremer Helmuth & Boldron Francois & Roy Bernard, 2008. "Worksharing: A Calibrated Model," Review of Network Economics, De Gruyter, vol. 7(2), pages 1-22, June.
    2. 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.
    3. Billette de Villemeur, Etienne & Cremer, Helmuth & Roy, Bernard & Toledano, Joëlle, 2003. "Optimal Pricing and Price-Cap Regulation in the Postal Sector," Journal of Regulatory Economics, Springer, vol. 24(1), pages 49-62, July.
    4. Christian Jaag & Helmut Dietl, 2011. "Postal and Regulatory Reform in Intermodal Competition," Working Papers 0031, Swiss Economics.
    5. Jaag Christian, 2011. "What is an Unfair Burden? Compensating the Net Cost of Universal Service Provision," Review of Network Economics, De Gruyter, vol. 10(3), pages 1-32, September.
    6. 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.
    7. Tardiff Timothy J. & Taylor William E., 2003. "Aligning Price Regulation with Telecommunications Competition," Review of Network Economics, De Gruyter, vol. 2(4), pages 1-17, December.
    8. Laffont, Jean-Jacques & Tirole, Jean, 1990. "The regulation of multiproduct firms : Part II: Applications to competitive environments and policy analysis," Journal of Public Economics, Elsevier, vol. 43(1), pages 37-66, October.
    9. 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.
    10. Jaag Christian, 2011. "Entry Deterrence and the Calculation of the Net Cost of Universal Service Obligations," Review of Network Economics, De Gruyter, vol. 10(1), pages 1-19, March.
    11. Armstrong Mark, 2008. "Access Pricing, Bypass and Universal Service in Post," Review of Network Economics, De Gruyter, vol. 7(2), pages 1-16, June.
    12. Michael A. Crew & Paul R. Kleindorfer (ed.), 2009. "Progress in the Competitive Agenda in the Postal and Delivery Sector," Books, Edward Elgar Publishing, number 13248.
    13. Beat Friedli & Christian Jaag & Daniel Kraehenbuehl & Ole Bach Nielsen & Søren-Michael Pihl & Urs Trinkner, 2006. "Consumer preferences and last mile pricing in the postal sector," Working Papers 0004, Swiss Economics, revised Jul 2006.
    14. 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.
    15. 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 & Martin Maegli, 2014. "Market Regulations and USO in the Revised Swiss Postal Act: Provisions and Authorities," Working Papers 0048, Swiss Economics.
    2. Haller Andreas & Christian Jaag & Urs Trinkner, 2014. "USO cost allocation rules and welfare," Working Papers 0049, Swiss Economics.

    More about this item

    Keywords

    Universal service obligation; Postal sector; Net cost; Price regulation;

    JEL classification:

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

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