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Entry Deterrence and the Calculation of the Net Cost of Universal Service Obligations

abstract This paper relates to the current discussion about how to measure the net cost and the unfair burden of universal service provision in network industries. The established profitability cost approach compares the profit of a universal service provider (USP) with and without a universal service obligation (USO). This paper argues that the net cost of universal service provision critically depends on the regulatory counterfactual and hence the USP’s strategy space without USO. On the one hand, a strong USO limits the USP’s means to position itself in the market, which offers cream-skimming opportunities and invites competition. On the other hand, a simple game-theoretic entry analysis shows that the USO may effectively serve as a valuable strategic commitment device to deter entry. Hence, the USO may be valuable to the USP despite causing inefficient operations. From a policy perspective, this constitutes a counter-intuitive result for the definition of the USO: the stricter it is regulated, the more detrimental it may be to competition and, therefore, the smaller is its burden on the USP
   
type journal paper
   
keywords Entry Deeterrence, Universal Service
   
language English
kind of paper journal article
date of appearance 3-2011
journal Review of Network Economics
publisher de Gruyter (Boston, Mass.)
ISSN (online) 1446-9022
DOI 10.2202/1446-9022.1189
volume of journal 10
number of issue Heft 1
page(s) 1-19
review double-blind review
   
citation Jaag, C. (2011). Entry Deterrence and the Calculation of the Net Cost of Universal Service Obligations. Review of Network Economics, 10(Heft 1), 1-19, DOI:10.2202/1446-9022.1189.