GRADUAL NETWORK EXPANSION AND UNIVERSAL SERVICE OBLIGATIONS

Abstract

**: Universal service obligations are usually not competitively neutral as they modify the way firms compete in the market. In this paper, we consider a continuum of local markets in a dynamic setting with a stochastically growing demand. The incumbent must serve all markets (ubiquity) possibly at a uniform price and an entrant decides on its market coverage before firms compete in prices. Connecting a market involves a sunk cost. We show that the imposition of a uniform price constraint modifies the timing of entry: for low connection cost markets, entry occurs earlier while for high connection cost markets, entry occurs later.