Skimming the Others' Cream Competitive Effects of an Asymmetric Universal Service Obligation

Hélène Bourguignon and Jorge Andrés Ferrando Yanez
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Hélène Bourguignon: Crest
Jorge Andrés Ferrando Yanez: Crest

No 2003-43, Working Papers from Center for Research in Economics and Statistics

Abstract: In a competitive environment, universal service obligations (USOs) appear as constraintsimposed on firm behaviour, and are often presented as a burden to the concerned firms.However, we show that USOs might benefit firms by acting as first mover advantages for theincumbent. We build a simple model of two-part tariff competition between two firms, one ofwhich provides an ‘essential' good and is subject to a USO requiring ubiquity and uniformpricing, while the other is subject to uniform pricing only, a situation common in energymarkets. Surprisingly, the geographic component of the USO incites the incumbent to pricemore aggressively and induces reduced entry, even though the entrant is able to "creamskim" the market. We interpret this result as partial appropriation by the incumbent of thesurplus brought to the economy by the entrant, and study the conditions under which thestrategies at hand might be put to work.

Date: 2003
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