The Welfare Gain from Efficient Pricing of Local Telephone Services

Abstract

T HE pricing of telecommunications services is analogous to a crossword puzzle, with about half the words filled in by recent research. For example, the words were first added by Mayor and Daly.' This study shows that the old policy of free directory assistance resulted in an annual welfare loss of at least 500 million dollars. At the same time, Rohlfs2 and Griffin3 have added the words long showing that the current practice of pricing longdistance well in excess of long-run incremental costs in order to subsidize telephone results in even greater welfare losses. Our purpose here is to complete the phrase local measured service first begun by Bridger Mitchell.4 In contrast to traditional flat-rate pricing in which a customer pays a fixed amount for an unlimited number of calls, measured features an access fee for connection to the network and a separate bill for usage. The usage bills can be quite complex, varying by the number of calls, their duration, their distance, and the time of day. Our analytic framework is one of applied welfare analysis, with a model that characterizes both the market for access and