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Skimming the Others' Cream Competitive Effects of an Asymmetric Universal Service Obligation

Author

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  • Hélène Bourguignon

    (Crest)

  • Jorge Andrés Ferrando Yanez

    (Crest)

Abstract

In a competitive environment, universal service obligations (USOs) appear as constraintsimposed on firm behaviour, and are often presented as a burden to the concerned firms.However, we show that USOs might benefit firms by acting as first mover advantages for theincumbent. We build a simple model of two-part tariff competition between two firms, one ofwhich provides an ‘essential' good and is subject to a USO requiring ubiquity and uniformpricing, while the other is subject to uniform pricing only, a situation common in energymarkets. Surprisingly, the geographic component of the USO incites the incumbent to pricemore aggressively and induces reduced entry, even though the entrant is able to "creamskim" the market. We interpret this result as partial appropriation by the incumbent of thesurplus brought to the economy by the entrant, and study the conditions under which thestrategies at hand might be put to work.

Suggested Citation

  • Hélène Bourguignon & Jorge Andrés Ferrando Yanez, 2003. "Skimming the Others' Cream Competitive Effects of an Asymmetric Universal Service Obligation," Working Papers 2003-43, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2003-43
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    References listed on IDEAS

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    1. Philippe Choné & Laurent Flochel & Anne Perrot, 1999. "Allocating and Funding Universal Service Obligations in a Competitive Network Market," Working Papers 99-55, Center for Research in Economics and Statistics.
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    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 169-190, March.
    6. Dessein, Wouter, 2003. " Network Competition in Nonlinear Pricing," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 593-611, Winter.
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    9. Chone, Philippe & Flochel, Laurent & Perrot, Anne, 2000. "Universal service obligations and competition," Information Economics and Policy, Elsevier, vol. 12(3), pages 249-259, September.
    10. 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.
    11. 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.
    12. 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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