On the Definition of Affordable Prices under Universal Service Obligations

39 Pages Posted: 5 Apr 2010

See all articles by Ramiro Losada

Ramiro Losada

Comision Nacional del Mercado de Valores

Date Written: March 31, 2010

Abstract

In this paper, we investigate the social welfare implications of the European and American definition of affordable prices when a country is divided into independent zones. We find that the European definition is always social welfare superior, because it forces prices to be kept lower. We also introduce two new definitions of affordable prices. The first definition advocates a common price for the unprofitable area. We prove that this definition is social welfare superior to the current definitions.In the second definition denoted as {"yardstick pricing"}, we define the affordable prices for the unprofitable areas as a function that does not depend on their own zone profitable area price. We show that yardstick pricing is more efficient for social welfare when the differences in demand among zones are not very large.

Keywords: Universal Service Obligations, Affordable

JEL Classification: I31, L96

Suggested Citation

Losada, Ramiro, On the Definition of Affordable Prices under Universal Service Obligations (March 31, 2010). Available at SSRN: https://ssrn.com/abstract=1582328 or http://dx.doi.org/10.2139/ssrn.1582328

Ramiro Losada (Contact Author)

Comision Nacional del Mercado de Valores ( email )

c/edison 4
Madrid, Madrid 28006
Spain

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