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Funding Universal Services: Cross-subsidization and Net cost balancing

Author

Listed:
  • Urs Trinkner
  • Christian Jaag
  • Andreas Haller

Abstract

Incumbent operators providing universal services are increasingly active in competitive markets. Prices of universal services (US) products are often regulated. The traditional solution is to regulate the US products by separating accounts between US and non-US products and imposing a product-specific rate-of-return regulation on US products with fully allocated cost based on activities (ABC) as a point of reference. In this paper we analyze the competitive and welfare effects of the Swiss net cost balancing mechanism (NCB). NCB is applied since 2013 and allows the regulated USP to reallocate its net cost of the universal service obligation through internal transfer payments. The analysis in Section 2 leads to the conclusion that NCB is as least as strict as anti-cross-subsidization rules based on Faulhaber. If general competition law applies to non-universal services, NCB can be considered stricter. NCB can therefore be seen as an implementation of the Faulhaber rule. We further find that NCB increases welfare as compared to ABC costing clearly. The welfare increases are induced by a more market oriented, but cross-subsidy free USP pricing.

Suggested Citation

  • Urs Trinkner & Christian Jaag & Andreas Haller, 2019. "Funding Universal Services: Cross-subsidization and Net cost balancing," Working Papers 0064, Swiss Economics.
    • Handle: RePEc:chc:wpaper:0064
    as

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    References listed on IDEAS

    as
    1. 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.
    2. Christian Jaag & Martin Maegli, 2015. "Market Regulations and USO in the Revised Swiss Postal Act: Provisions and Authorities," Topics in Regulatory Economics and Policy, in: Michael A. Crew & Timothy J. Brennan (ed.), Postal and Delivery Innovation in the Digital Economy, edition 127, pages 301-311, Springer.
    3. Parsons, Steve G, 1998. "Cross-Subsidization in Telecommunications," Journal of Regulatory Economics, Springer, vol. 13(2), pages 157-182, March.
    4. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-977, December.
    5. Haller Andreas & Christian Jaag & Urs Trinkner, 2014. "USO cost allocation rules and welfare," Working Papers 0049, Swiss Economics.
    6. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    USO; cost allocation; net cost rebalancing; ramsey pricing; ABC;
    All these keywords.

    JEL classification:

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

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