Effect of Competition on Decisions Regarding Tariff Rebalancing, Cross-Subsidization, and Funding of Social Obligations

[NOTE: Readers should cross-reference this section with Social Aspects.]

Core References

Regulation and Inefficient Entry
Nuffield College, Oxford, February 2000.
Armstrong, Mark

Explores regulation can promote inefficient entry. Considers protection of entrants, universal service obligations, asymmetric regulation, deregulation, access to essential facilities, price averaging, and regulation of price structures.

Universal Service: An Economic Perspective
Annals of Public and Cooperative Economics 72(1): 2001, pp. 5-43.
Cremer, H., F. Gasmi, A. Grimaud, and J.J. Laffont

Gives a detailed account of the issues related to the definition, the economic justification, the cost, and the financing of universal service. Provides a systematic analysis of the tradeoffs raised by the implementation of universal service in both a regulated and a deregulated market. Surveys some universal service experiences in the telecommunications and postal services.

Price Structures, Cross-Subsidies, and Competition in Infrastructure
Note no. 107 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1997.
Irwin, Timothy

States that price discrimination designed to favor one group over another generally does not withstand competition, but rebalancing the price structure has costs for some groups that may exceed the benefits they receive from increased competition. Options are discussed. Finds that most schemes in which one firm supplies services at low prices and is compensated by its competitors are in telecommunications. Also finds that the reform of the Chilean water supply industry replaced cross-subsidies with a price subsidy targeted at low-income households. Describes how New Zealand eliminated subsidies and relied on existing social safety nets.

The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapter 6.
Kahn, Alfred

Examines issues of pricing in the presence of competition. Discusses issues of cross subsidy and price flexibility.

Sectoral References


Basics of Rate Design – Pricing Principles and Self-Selecting Two-Part Tariffs
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 74-90.
Berg, S.

Explains that cost allocation manuals are becoming increasingly irrelevant as the electricity industry becomes more competitive. Argues that: (1) Evidence from other industries suggests that competition will force marginal price towards incremental cost; (2) Electric utilities are going to have to generate value for customers by devising new rate designs, which create win-win opportunities; and (3) Incremental cost pricing promotes the efficient use of society’s resources, and price options enable the supplier to extract more consumer surplus than under uniform pricing — which enhances the financial viability of a firm under competitive pressure.

Making Competition Work in Electricity
New York: Wiley & Sons, 2002, Chapters 16-18.
Hunt, Sally

Examines transmission pricing and the functions of the Independent System Operator and the transmission operators. Discusses issues of market power and the roles regulators can play to control or disperse market power. Also discusses retail pricing with stranded costs.


The Welfare Consequences of Tariff Rebalancing in the Domestic Gas Market
Fiscal Studies 17(4): 1996, pp. 49-65.
Gomez-Lobo, A.

Asserts that competitive reforms in U.K. energy markets will make tariffs more cost-reflective, threatening cross-subsidies between consumer groups. Focuses on the welfare impact of competition on the traditional cross-subsidy, namely, the fact that the “standing charge,” a charge that is independent of the amount consumed, is set smaller than the fixed cost while the unit price exceeds the marginal cost.


Regulatory Techniques for Addressing Interconnection, Access, and Cross-Subsidy in Telecommunications
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 113-129.
Jamison, M.

Describes approaches that regulators use for controlling cross subsidization.

ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.

Explains that the term “rebalancing” refers to moving the prices for different telecommunications services more closely in line with the costs of providing each service. Further states that: (1) Prices of telephone connections, monthly subscriptions, and local calls have traditionally been set below costs in many countries; (2) Unbalanced price structures are not sustainable in a competitive environment; and (3) Traditional unbalanced price structures are also inefficient in that higher-than-cost prices encourage uneconomic entry by high-cost operators, and lower-than-cost prices discourage economic entry, even by low-cost operators.

Telecommunications Privatization and Tariff Rebalancing: Evidence from Latin America
Telecommunications Policy 24(3): 2000, pp. 233-52.
Ros, A., and A. Banerjee

Addresses the relationship between network expansion and tariff rebalancing under privatization of telecommunication services. Using cross-sectional information on privatization programs in Latin American countries, shows how privatization is a policy that gives incentives for network expansion. Finds that tariff rebalancing, understood as an increase in residential service prices to reflect costs, also leads to network expansion and efficiency improvement.


Principles of Transport Economics
North Hampton, Massachusetts: Edward Elgar Publishing Company, 2004.
Quinet, Emile and Roger Vickerman

Explains that regulation is sometimes seen as a program for consumer protection, rather than a system to guarantee fairness to all parties including producers. Economic regulation has all but disappeared from North American transportation. The railways were severely disadvantaged by regulation. The motor carriers took advantage of regulatory curbs on competition as did the airlines. In both cases, the unions extracted much of the benefits.

Key Words

Efficiency, Price structure, Marginal cost pricing, Multi-part tariffs, Ramsey pricing, Two-part tariffs, Competition, Cross-subsidy, Universal service


Case Studies

Regulatory Reforms in India: Effectiveness, Efficiency, and Impacts
The Energy and Resources Institute, New Delhi, India, 2003.
Garg, A., M. Kabra, and R. Kacker

Regulatory Accounting in Practice: A Report prepared by the IRG Regulatory Accounting Working Group
April 2006.
IRG Regulatory Accounting Working Group

Rate Rebalancing and Competition in Peruvian Telecommunications
Prepared for presentation at the International Telecommunications Society meetings held in Stockholm, Sweden, June 1998.
Rohlfs, Jeffrey H. and Arturo Briceño

Telecommunications Privatization and Tariff Rebalancing: Evidence from Latin America
Telecommunications Policy 24(3): 2000, pp. 233-52.
Ros, A., and A. Banerjee