Working Paper: CEPR ID: DP2789
Authors: Tommaso Valletti; Steffen Hoernig; Pedro Pita Barros
Abstract: Universal service objectives are pervasive in telecommunications, and have gained new relevance after liberalization and the introduction of competition in many markets. Despite their policy relevance, little work has been done allowing for a thorough discussion of instruments designed to achieve universal service objectives under competition. We intend to fill this gap, and consider various policy instruments, such as constraints on pricing and coverage. It is shown that these are not competitively neutral and may have far-reaching strategic effects. Equilibrium coverage of both incumbent and entrant may be lower than without regulation, and firms may even (noncooperatively) leave each others' markets to lessen competitive pressure in their remaining markets. These effects depend on which measures are imposed at the same time, thus no single measure can be evaluated in isolation. We also point out that different groups of consumers are affected in different ways, making welfare comparisons difficult.
Keywords: competition; coverage constraint; uniform pricing constraint; universal service
JEL Codes: L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uniform pricing constraints (D41) | higher prices for duopoly customers (D42) |
| uniform pricing constraints (D41) | lower coverage for both incumbents and entrants (L13) |
| coverage constraints (G52) | increased prices (P22) |
| coverage constraints (G52) | reduced welfare for previously served consumers (I38) |
| interaction of coverage constraints and pricing strategies (D49) | complex outcomes (C35) |