Having Your Cake: How to Preserve Universal- Service Cross Subsidies While Facilitating Competitive Entry

Abstract

Differential pricing for access to bottleneck inputs such as local telephone facilities or electricity transmission facilities is shown to solve the old dilemma of deregulation. facilitating competitive entry without destroying cross subsidies indispensable for "universal service" programs. If bottleneck facilities are inputs to two services, one of which subsidizes the other, entrants that provide the subsidized service must receive the same subsidy in the access price as consumers receive when they purchase those services. Rivals in the supply of the other service must contribute an equivalent subsidy through paying a higher access price. Differential access pricing allows efficient competitors to find it equally profitable to supply either service because any motive for "cream skimming" disappears. Such differential pricing, coupled with access pricing consistent with the Efficient Component Pricing Rule, is shown to be necessary for economic efficiency.