A Test for Cross Subsidies in Local Telephone Rates: Do Business Customers Subsidize Residential Customers?

Karen Palmer

RAND Journal of Economics, 1992, vol. 23, issue 3, 415-431

Abstract: Recent regulatory and technological changes suggest that the local telecommunications market may soon present opportunities for profitable entry. Bypass activity by businesses, combined with the generally higher business rates, suggests that business-service revenues may be subsidizing residential access to the local network. Before regulators allow wide-scale entry into local telecommunications, they need to know if local phone service rates exhibit cross subsidies. Using data supplied by New England Telephone, this article tests a new set of sufficient conditions for cross subsidization that do not require observations on stand-alone cost. The results indicate that business-service revenues subsidize residential-service provision at nearly 65% of the suburban central offices. The sufficient conditions for a residential-to-business cross subsidy fail for all central offices in the sample.

Date: 1992
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