Can universal service survive in a competitive telecommunications environment? Evidence from the United States consumer expenditure survey

Abstract

The purpose of this paper is to assess the impact of reducing the magnitude of the cross-subsidy in telephone services pricing that flows from long-distance service to local service on the consumption of both of these telephone services and consumer welfare at the household level. Our econometric modeling framework specifies a complete system of household-level demand functions that are derived from the assumption of utility maximization. Our primary data source is the Bureau of Labor Statistics' Survey of Consumer Expenditures. In addition to local and long-distance phone service, food, clothing, and other non-durable expenditures are included in our five-good demand system. All of our price change scenarios point to the conclusion that there appears to be little loss in household-level welfare and little, if any, reduction in the number of households connected to the local telephone network, due to the projected reductions in this cross-subsidy brought about by an increasing amount of competition in all telecommunications markets. In addition, we find that if these local service price increases are coupled with reductions in the price of long-distance service, the net effect can actually be a gain in consumer welfare for a large fraction of households which in the aggregate yields a net benefit to the population of United States households.