DP5052 Should Uniform Pricing Contraints be Imposed on Entrants?

Author(s): Steffen Hoernig
Publication Date: May 2005
Keyword(s): coverage constraints, entry, price caps, uniform pricing, universal service obligations
JEL(s): L43, L51, L52
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5052

This paper analyses the effects of universal service obligations, such as uniform pricing, coverage constraints and price caps, on markets newly opened to competition, e.g. broadband services. We show that the requirement of uniform pricing has strong repercussions on coverage decisions. Imposed on the incumbent only, it may distort his coverage decision downward to avoid duopoly entry. If also imposed on entrants it increases the likelihood that entry leads to independent monopolies rather than competition. A large enough coverage constraint on the incumbent re-establishes incentives for duopoly entry, but may lead to higher prices.