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Regulating a Monopoly with Universal Service Obligation: The Role of Flexible Tariff Schemes

This paper’s purpose is to study the problem of a regulator of a utility monopoly, who has a universal service goal that is binding, in the sense that there is no two- part tariff that can induce efficient consumption, self-finance the firm, and guarantee universal access at the same time. The optimal two-part tariffs that the regulator should set under the following three different regulatory rules are derived: no flexibility (the monopolist just offers the regulated plan), partial flexibility (the monopolist can offer alternative plans, but these -and the regulated one- must be available to all customers), and full flexibility (the regulated plan must be available to all customers, but not the alternative ones). The solutions under the three schemes are characterized, and provide an unambiguous ranking of regulatory rules: total flexibility is weakly better than partial flexibility, with the latter being strictly better than no flexibility.

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Paper provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its series ILADES-Georgetown University Working Papers with number inv239.

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Length: 27 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:ila:ilades:inv239
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  1. Mirabel, F. & Poudou, J.-C. & Roland, M., 2009. "Universal service obligations: The role of subsidization schemes," Information Economics and Policy, Elsevier, vol. 21(1), pages 1-9, February.
  2. Steffen Hoernig, 2006. "Should uniform pricing constraints be imposed on entrants?," Journal of Regulatory Economics, Springer, vol. 30(2), pages 199-216, 08.
  3. Sappington, David E M & Sibley, David S, 1988. "Regulating without Cost Information: The Incremental Surplus Subsidy Scheme," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(2), pages 297-306, May.
  4. Foros, Oystein & Kind, Hans Jarle, 2003. "The Broadband Access Market: Competition, Uniform Pricing and Geographical Coverage," Journal of Regulatory Economics, Springer, vol. 23(3), pages 215-35, May.
  5. Barros, Pedro Luis Pita & Hoernig, Steffen & Valletti, Tommaso, 2001. "Universal Service and Entry: the Role of Uniform Pricing and Coverage Constraints," CEPR Discussion Papers 2789, C.E.P.R. Discussion Papers.
  6. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  7. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
  8. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
  9. Vogelsang, Ingo, 1989. "Two-part tariffs as regulatory constraints," Journal of Public Economics, Elsevier, vol. 39(1), pages 45-66, June.
  10. David Sibley, 1989. "Asymmetric Information, Incentives and Price-Cap Regulation," RAND Journal of Economics, The RAND Corporation, vol. 20(3), pages 392-404, Autumn.
  11. Bertoletti, Paolo & Poletti, Clara, 1997. "Welfare effects of discriminatory two-part tariffs constrained by price caps," Economics Letters, Elsevier, vol. 56(3), pages 293-298, November.
  12. Michael H. Riordan, 1984. "On Delegating Price Authority to a Regulated Firm," RAND Journal of Economics, The RAND Corporation, vol. 15(1), pages 108-115, Spring.
  13. Mark Armstrong & John Vickers, 1991. "Welfare Effects of Price Discrimination by a Regulated Monopolist," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 571-581, Winter.
  14. Manuel Willington & Fabián Basso, 2006. "Regulación, Cobertura y Competencia en el Mercado de la Banda Ancha," ILADES-Georgetown University Working Papers inv177, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  15. Vogelsang, Ingo, 1990. "Optional two-part tariffs constrained by price caps," Economics Letters, Elsevier, vol. 33(3), pages 287-292, July.
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