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USO cost allocation rules and welfare

Author

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  • Haller Andreas
  • Christian Jaag
  • Urs Trinkner

Abstract

Universal service providers (USP) are increasingly active in business segments other than the segment consisting of their Universal Service Obligation (USO). Price regulation of USO services is usually cost-oriented and differentiated between USO- and non-USO-products. Hence, regulatory rules on cost allocation impact regulated prices and overall welfare. In this paper we analyse the effect of various cost allocation rules on the financing of USO, assuming a profit regulation in place. We use a stylized model with a set of products characterized by different price elasticities perceived by the USP. The model is calibrated for a scenario representing the postal market in industrialized countries. As a benchmark, we derive a welfare optimal allocation of costs based on Ramsey prices such that the incumbent USP breaks even. We then compare this result to cost allocation rules applied in practice: Fully distributed cost based on activities (ABC), and cost allocated according to a net cost rebalancing (NCR) mechanism. Under NCR, a regulated USP is allowed to reallocate the net cost of the USO through internal transfer payment. We find that cost allocation rules strongly affect prices and welfare under price control. NCR increases welfare clearly as compared to ABC.

Suggested Citation

  • Haller Andreas & Christian Jaag & Urs Trinkner, 2014. "USO cost allocation rules and welfare," Working Papers 0049, Swiss Economics.
    • Handle: RePEc:chc:wpaper:0049
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    References listed on IDEAS

    as
    1. Jaag Christian, 2013. "Price Regulation and the Financing of Universal Services in Network Industries," Review of Law & Economics, De Gruyter, vol. 9(1), pages 125-150, September.
    2. Christian Jaag & Martin Maegli, 2015. "Market Regulations and USO in the Revised Swiss Postal Act: Provisions and Authorities," Topics in Regulatory Economics and Policy, in: Michael A. Crew & Timothy J. Brennan (ed.), Postal and Delivery Innovation in the Digital Economy, edition 127, pages 301-311, Springer.
    3. Parsons, Steve G, 1998. "Cross-Subsidization in Telecommunications," Journal of Regulatory Economics, Springer, vol. 13(2), pages 157-182, March.
    4. Faulhaber, Gerald R, 1975. "Cross-Subsidization: Pricing in Public Enterprises," American Economic Review, American Economic Association, vol. 65(5), pages 966-977, December.
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    Cited by:

    1. Urs Trinkner & Christian Jaag & Andreas Haller, 2019. "Funding Universal Services: Cross-subsidization and Net cost balancing," Working Papers 0064, Swiss Economics.
    2. Christian Jaag & Martin Maegli, 2015. "Market Regulations and USO in the Revised Swiss Postal Act: Provisions and Authorities," Topics in Regulatory Economics and Policy, in: Michael A. Crew & Timothy J. Brennan (ed.), Postal and Delivery Innovation in the Digital Economy, edition 127, pages 301-311, Springer.

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    More about this item

    Keywords

    USO; cost allocation; net cost rebalancing; ramsey pricing; ABC;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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