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

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  • Karen Palmer

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.

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  • Karen Palmer, 1992. "A Test for Cross Subsidies in Local Telephone Rates: Do Business Customers Subsidize Residential Customers?," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 415-431, Autumn.
    • Handle: RePEc:rje:randje:v:23:y:1992:i:autumn:p:415-431
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    Cited by:

    1. Ming Chung Chang & Hsiao‐Ping Peng, 2009. "Structure Regulation, Price Structure, Cross‐Subsidization And Marginal Cost Of Public Funds," Manchester School, University of Manchester, vol. 77(6), pages 675-698, December.
    2. Carlos Perez Montes, 2012. "Regulatory bias in the price structure of local telephone services," Working Papers 1201, Banco de España.
    3. Daniel Ackerberg & Michael Riordan & Gregory Rosston & Bradley Wimmer, 2008. "Low-Income Demand for Local Telephone Service: Effects of Lifeline and Linkup," Discussion Papers 07-032, Stanford Institute for Economic Policy Research.
    4. Gianni De Fraja & Fabio M. Manenti, "undated". "How Long Is A Piece Of Wire? Equilibrium Determination Of Local Telephone Areas," Discussion Papers 00/03, Department of Economics, University of York.
    5. Gregory L. Rosston & Scott J. Savage & Bradley S. Wimmer, 2006. "The Impact of "Deregulation" on Regulator Behavior: An Empirical Analysis of the Telecommunications Act of 1996," Discussion Papers 05-006, Stanford Institute for Economic Policy Research.
    6. David Kaserman & John Mayo & Larry Blank & Simran Kahai, 1999. "Open Entry and Local Telephone Rates: The Economics of IntraLATA Toll Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 14(4), pages 303-319, June.
    7. Ackerberg, Daniel A. & DeRemer, David R. & Riordan, Michael H. & Rosston, Gregory L. & Wimmer, Bradley S., 2014. "Estimating the impact of low-income universal service programs," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 84-98.
    8. Pérez Montes, Carlos, 2013. "Regulatory bias in the price structure of local telephone service," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 462-476.
    9. Bikram Ghosh & Subramanian Balachander, 2007. "Research Note--Competitive Bundling and Counterbundling with Generalist and Specialist Firms," Management Science, INFORMS, vol. 53(1), pages 159-168, January.
    10. Eriksson, Ross C & Kaserman, David L & Mayo, John W, 1998. "Targeted and Untargeted Subsidy Schemes: Evidence from Postdivestiture Efforts to Promote Universal Telephone Service," Journal of Law and Economics, University of Chicago Press, vol. 41(2), pages 477-502, October.
    11. Samara Mendez & Gabor Molnar & Scott J. Savage, 2021. "The Impacts of the Lifeline Subsidy on High-Speed Internet Access," Journal of Law and Economics, University of Chicago Press, vol. 64(4), pages 745-782.
    12. Gregory L. Rosston & Scott J. Savage & Bradley S. Wimmer, 2008. "The Effect of Private Interests on Regulated Retail and Wholesale Prices," Journal of Law and Economics, University of Chicago Press, vol. 51(3), pages 479-501, August.
    13. Xiaolei Wang & Boqiang Lin, 2017. "Electricity subsidy reform in China," Energy & Environment, , vol. 28(3), pages 245-262, May.
    14. Wimmer, Bradley S. & Rosston, Gregory L., 2005. "Local telephone rate structures: before and after the Act," Information Economics and Policy, Elsevier, vol. 17(1), pages 13-34, January.
    15. Crandall, Robert W., 1997. "Are telecommunications facilities 'infrastructure?' If they are, so what?," Regional Science and Urban Economics, Elsevier, vol. 27(2), pages 161-179, April.
    16. Sawkins, John W. & Reid, Scott, 2007. "The measurement and regulation of cross subsidy. The case of the Scottish water industry," Utilities Policy, Elsevier, vol. 15(1), pages 36-48, March.
    17. Chattopadhyay, Pradip, 2007. "Testing viability of cross subsidy using time-variant price elasticities of industrial demand for electricity: Indian experience," Energy Policy, Elsevier, vol. 35(1), pages 487-496, January.
    18. Segendorff, Björn, 1995. "The Telecommunication Market: A Survey of Theory and Empirics," Working Paper Series 442, Research Institute of Industrial Economics.
    19. Krouse, Clement G & Cabolis, Christos & Danger, Kenneth L & Carter, Tanja D & Riddle, Jon M & Ryan, Daniel J, 1999. "The Bell System Divestiture/Deregulation and the Efficiency of the Operating Companies," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 61-87, April.
    20. Simran Kahai & David Kaserman, 2007. "Effective regulation versus tacit collusion in the long-distance market: an empirical analysis," Journal of Regulatory Economics, Springer, vol. 32(3), pages 247-257, December.

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