Working Paper: CEPR ID: DP5052
Authors: Steffen Hoernig
Abstract: This paper analyses the effects of universal service obligations, such as uniform pricing, coverage constraints and price caps, on markets newly opened to competition, e.g. broadband services. We show that the requirement of uniform pricing has strong repercussions on coverage decisions. Imposed on the incumbent only, it may distort his coverage decision downward to avoid duopoly entry. If also imposed on entrants it increases the likelihood that entry leads to independent monopolies rather than competition. A large enough coverage constraint on the incumbent re-establishes incentives for duopoly entry, but may lead to higher prices.
Keywords: coverage constraints; entry; price caps; uniform pricing; universal service obligations
JEL Codes: L43; L51; L52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Uniform pricing constraints on incumbents (D43) | reduced coverage to avoid duopoly entry (L43) |
| sufficiently large coverage constraint on incumbents (L96) | restore incentives for duopoly entry (D43) |
| Uniform pricing imposed on entrants (L11) | increased likelihood of independent monopolies (L12) |