Cross-subsidization in telecommunications: Beyond the universal service fairy tale

Abstract

For many years, regulatory policy in the telecommunications industry has been strongly influenced by the belief that the traditional system of cross-subsidizing local rates by long distance has served to promote the goal of universal service. In this paper, we examine both the theoretical and empirical support for this widely accepted relationship and find it wanting in each. The results indicate that the cross-subsidization mechanism bears no causal relationship to the policy goal of universal service. Instead, both the subsidy levels and subscription rates appear to be determined by other economic variables, such as those suggested by the economic theory of regulation.