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Universal Service Obligations and Competition with Asymmetric Information

J.C. Poudou, M. Roland and L. Thomas

Cahiers du LASER (LASER Working Papers) from LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1

Abstract: This paper takes into account adverse selection in the implementation of universal service obligations (USOs) for a network industry with no bypass. USOs are characterized by a coverage constraint imposed on the network’s owner. We develop fully the model for a welfare maximizing coverage constraint and explain how to adapt it for a full coverage (ubiquity) constraint. We use a market without USO as a benchmark case. We show that, because of information rents, a sufficiently high shadow cost of public funds can lead to a lower coverage with the USO than without it when firms turn out to be relatively inefficient. If the regulator is able to determine the industry structure by issuing licences to operate, the optimal number of firms reflects a trade-off between allocative efficiency and the industry capacity to finance internally the USO. The shadow cost of public funds then plays a dual role as it determines the terms of this efficiency funding trade-off in addition to the terms of the traditionnal efficiency rent trade-off.

Keywords: universal service obligations; coverage constraints; asymmetric information; regulation (search for similar items in EconPapers)
JEL-codes: D82 K23 L43 L51 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2007
New Economics Papers: this item is included in nep-com, nep-law, nep-mic, nep-net and nep-reg
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