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

Christian Jaag

No 20, Working Papers from Swiss Economics

Abstract: This paper relates to the current discussion about how to measure the net cost and 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. A strong USO invites competition by limiting the USP?s means to position itself in the market and by thereby offering cream-skimming opportunities. 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 and hence may be valuable to the USP despite causing inefficient production. 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.

Keywords: Universal service obligation; Postal sector; Net cost (search for similar items in EconPapers)
JEL-codes: L51 (search for similar items in EconPapers)
Date: 2010-06
New Economics Papers: this item is included in nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Entry Deterrence and the Calculation of the Net Cost of Universal Service Obligations (2011)
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