The Simple Welfare Economics of Network Externalities and the Uneasy Case for Subscribership Subsidies

A H Barnett and David L Kaserman

Journal of Regulatory Economics, 1998, vol. 13, issue 3, 245-54

Abstract: The goal of universal service has dominated the telecommunications policy landscape for at least the past half century. This policy objective has been promoted with cross subsidies from long-distance telecommunications services to subscribers to local telecommunications service. The economic rationale for these cross subsidies is network externalities. In this paper, we show that: (1) the presence of network externalities, even if substantial in overall magnitude, does not generally justify a subscribership subsidy, even a well-designed one; and (2) the empirical realities of telecommunications markets make it unlikely that subscribership subsidies of any kind will increase social welfare. Copyright 1998 by Kluwer Academic Publishers

Date: 1998
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