Abstract
We study the dynamic effects of technical progress on competitive prices. The model facilitates comparison between competitive prices and the TELRIC prices the FCC adopted for determining universal service subsidies. The prices differ due to differences in (1) discount factors, (2) the stream of operating costs, and (3) the method used to discount revenues. A calibrated comparison reveals the last difference as most important, with TELRIC prices understating competitive prices by billions of present value dollars nationwide. Competitive prices can be derived without any depreciation assumptions, contrary to regulatory practice, but cannot be calculated in advance of costs once capital utilization is endogenized.
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