Local Telephone Service Research Articles

Two Views of Applied Welfare Analysis: The Case of Local Telephone Service Pricing

There are two standards that an economist may use to determine optimal prices. The first is Arnold Harberger's [3] utilitarian standard, which says that prices should be chosen to maximize the algebraic sum of consumer's and producer's surpluses. The second is the competitive standard, which regards any voluntary exchange as welfare-improving and therefore seeks prices that maximize such exchanges. The purpose of this essay is to briefly discuss these alternative theories of economic welfare, point out how they may conflict, and illustrate such a conflict in the pricing of local telephone service.

Natural monopoly and the deregulation of local telephone service

Natural monopoly theory fails to provide a credible reason for regulation. Before regulation, competition in the US telephone industry performed its classic function of providing discipline on prices, profits and costs. Loop-conserving technological developments have now reduced the minimum efficient size of entry and made local competition a feasible substitute for regulation. A policy of open entry, mandatory non-discriminatory interconnection, and allowing resale would bring this about. Politically, such an outcome is most likely when the local carriers' capital-recovery problems have been resolved, the toll-to-local subsidy has dissappeared, and parity is brought about between residence prices and costs.

Consumption Patterns and Self-selecting Tariffs

The authors describe and apply methods for empirically investigating the relation between consumption and tariff choice. These methods allow (1) testing of alternative specifications for the relations of tariff choice and consumption patterns, (2) estimation of parameters that provide information on the response of customers to marginal prices and fixed fees, and (3) a determination of the extent to which the assumptions embodied in welfare results on self-selecting tariffs are valid in a particular setting. They apply the procedures to residential demand for local telephone service in an area where households are offered a choice among tariffs. Copyright 1989 by MIT Press.

Orthopedic shoes for children with cerebral palsy in residual stage and with “pes equino-varus congenital” which is feebly marked or was surgically treated

When the billing of local telephone service is changed from flat rate to measured service, the distribution of monthly calling rates is altered. This paper models the distribution of flat-rate telephone use in terms of demographic variables and stochastic components; the shift to measured service affects both the systematic and stochastic parameters. The model is fitted by maximum likelihood to data for interviewed households participating in General Telephone's local-measured-service experiment in Illinois. Households tend to make more calls if they are larger (more people), older, or include teenagers. They tend to reduce calling proportionately more in response to usage charges if they average many calls under flat rate for any of the above reasons or for other, unexplained reasons. There is substantial variation in telephone use by households with similar demographic characteristics. Consequently, the benefits and costs of local measured service will tend to be diffused across demographic groups.

The Welfare Gain from Efficient Pricing of Local Telephone Services

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

The Demand for Local Telephone Service: A Fully Discrete Model of Residential Calling Patterns and Service Choices

We present an empirical model of households' choices among local telephone service options (for example, between flat-rate and measured service) and the interrelation of these choices with the number and average duration of local calls households make at each time of day to each geographical zone. Using a nested logit model with estimation performed on a randomly selected subset of the households' calling patterns, we calculate elasticities of demand for each local service option, number of calls, average duration, and revenues with respect to the fixed monthly charges and the usage charges for calling under each option. We find moderate price elasticities of number of calls with respect to usage charges for households subscribing to measured service. Nevertheless, raising usage charges has a negligible effect on revenues, since a sufficient number of households either originally subscribe to flat-rate service or convert to flat-rate service in response to higher usage charges. We find a high elasticity of demandfor each service option with respect to itsfixed monthlyfee. This indicates high substitutability among service options. The shift among service options induces new calling patterns, which wefind to be a small but not negligible indirect effect. E Most telephone operating companies offer residential customers several options for local service. There are two general categories of service: flat-rate service, under which a household can, for a fixed monthly charge, make an unlimited number of calls within a specified geographical area, and measured service, for which the household pays a lower fixed monthly fee but can make only a specified number (or dollar value) of calls at no extra charge, after which charges are incurred for additional calls. Various flat-rate services differ in the size of the geographical area in which calling is at no extra charge, with higher monthly fees for larger areas. Measured services differ with respect to the threshold number (or dollar value) of calls beyond which the customer is charged.

Price and Productivity Change Following Deregulation: The US Experience

No real world market is likely to be perfectly contestable, anymore than it is to be perfectly competitive. Yet, like its predecessor, the contestability benchmark proves highly useful as a framework for evaluating policies and outcomes. Under the contestability framework, entry and price regulation is deemed inappropriate in industries which do not have system-wide natural monopoly characteristics. On this criterion, brokerage, airline, trucking, long-distance telephone and terminal equipment should not be regulated. True, these industries may be characterised by some elements of scale economy, such as economies of vehicle size, so that at some level (city-pair routes) only a few firms may serve. But industry performance need not suffer in such an unregulated environment. Impediments to entry and exit, not concentration or scale of operations, may be the primary source of prices that are not welfare optimal. Even in the presence of natural monopoly characteristics, it is important to isolate those markets which are not yet structurally competitive, as in the case of coal shipments over which the railroads are judged to possess 'market dominance' or in local telephone service. It can be argued that the latter should continue to be overseen by regulators while markets which are controlled by competitive forces, deriving from actual or potential competition or taking other indirect but effective forms, should be free from traditional regulation. Thus, unlike privatisation policy in the United Kingdom, described in the companion article by Kay and Thompson (I985), US deregulatory policy can be construed as having a coherent rationale. The nature and extent of deregulation match remarkably well with the policy prescription of the theory. This paper analyses the consequences that have emerged under deregulation in terms of the following behavioural properties predicted by multi-product competition and contestability theory: a variety of products will emerge, each of which will yield zero economic profit; the revenues from any subset of the products must exceed the incremental costs of those products, so that no cross-subsidy can exist; prices for each product will equal or exceed marginal costs; and an equilibrium market structure will minimise costs for the industry (see Baumol

Satellites and mobile phones: Planning a marriage: Dramatic improvements in rural communications may be in the offing as direct service by satellite to mobile phones moves closer to reality

It is pointed out that cellular radio is not well suited for rural areas, where potential users are sparsely distributed. Mobile satellite service is seen as the ideal way to pick up where cellular leaves off, particularly if mobile units are developed that will work with either system. The new system could also provide nationwide two-way voice dispatch services. Interest in the new system is high in rural areas because the divestiture of the American Telephone & Telegraph Co. and the deregulation of the telephone industry are making local telephone service more expensive for rural subscribers. Of particular concern is the high cost of the rural local loop, the cable pair that connects the subscriber to an exchange. Mobile telephone service could replace the expensive local loop by connecting the rural telephone user directly to a large exchange, perhaps far away. A general description of a mobile satellite service is provided. Attention is also given to the regulatory change being considered by the US Federal Communication Commission.

Modelling the demand for optional classes of local measured telephone service

There is currently a strong movement under way in the telephone industry to unbundle access charges and usage charges for local telephone service. Pricing schemes with separate access and usage charges are called measured service options. Predicting which option a household will choose involves analysing a selection problem, referred to as the choice of class of service. This choice is estimated in a nested logit framework. The three major findings of this study are that the measured options are perceived as being very similar, many personal calls may originate from businesses if the pricing structure is changed, and that the flat rate price will have to be nearly doubled before the ‘take rate’ for flat rate pricing is significantly diminished.

Local measured telephone service in the USA: A quantitative analysis

The USA has steadfastly held to a flat rate for local telephone service, whereas most other countries are characterized by a user-sensitive (measured service) system of pricing. Economic theory suggests some method of measured service pricing more accurately reflects the true costs of local service. This article seeks to determine how many US consumers could be induced to switch to measured service pricing, and using ordinary least squares, derives a model of the demand for measured service. The factors are identified that will induce the US population to move towards a measured service rate structure. The findings indicate that consumers are quite responsive to both relative price (between a local flat rate and a measured service rate) and advertising.

Charging for local telephone calls: How household characteristics affect the distribution of calls in the GTE Illinois experiment

When the billing of local telephone service is changed from flat rate to measured service, the distribution of monthly calling rates is altered. This paper models the distribution of flat-rate telephone use in terms of demographic variables and stochastic components; the shift to measured service affects both the systematic and stochastic parameters. The model is fitted by maximum likelihood to data for interviewed households participating in General Telephone's local-measured-service experiment in Illinois. Households tend to make more calls if they are larger (more people), older, or include teenagers. They tend to reduce calling proportionately more in response to usage charges if they average many calls under flat rate for any of the above reasons or for other, unexplained reasons. There is substantial variation in telephone use by households with similar demographic characteristics. Consequently, the benefits and costs of local measured service will tend to be diffused across demographic groups.

Communications: AT&T plans ahead: The telecommunications giant will enter the commercial marketplace, drawing on its traditional technical strengths

After being in unchallenged control of 80 percent of all local telephone services in the United States for decades, the American Telephone & Telegraph Co. is preparing to lay aside that dominant role and enter such formerly forbidden marketing waters as data processing, computer communications, and telephone and computer-terminal equipment. All are areas from which it once was barred by Federal regulations. The radical shift, which will put the company in competition with International Business Machines Corp., Xerox Corp., Digital Equipment Corp., and other formidable rivals is based on the agreement last January between AT&T and the US Department of Justice. AT&T will emerge a much leaner company but with the potential for more profits, according to some analysts. The company's technology thrust, they say, will continue in five major areas: microelectronics, digital systems, software, photonics, and human-factors engineering.

Metering Costs and Marginal Cost Pricing in Public Utilities

This paper examines a welfare criterion for marginal cost pricing in the presence of metering costs. The good examined is local telephone service, which is viewed as two separate commodities: a connection to the system, and a charge for the telephone services actually used. The empirical results suggest that the rate structures of North American telephone utilities appear more consistent with rational pricing in the face of metering costs than with Averch-Johnson behavior.

Analysis and Prediction of Telephone Demand in Local Geographical Areas

An approach to forecasting the demand for local area telephone service is presented in this paper. The specific problem discussed is the forecasting of main stations in three Michigan metropolitan areas. Several different statistical models are used. The first class of models introduced used adaptive exponential smoothing and is based solely on the past history of the time series involved. Although appropriate data at the local area level are very difficult to obtain, two exogenous time series related to household formation are used to construct more elaborate models for one of the areas. The various models are evaluated by both the average absolute and the root-mean-square forecast error. In terms of these criteria, the first class of models referred to above performs reasonably well while the second set does considerably better. This argues strongly that future improvements in forecasting accuracy will be made by the more extensive involvement of exogenous variables.

Marginal-Cost Pricing of Local Telephone Service

Marginal-Cost Pricing of Local Telephone Service

Disequilibrium and Increasing Costs: A Study of Local Telephone Service

THE LITERATURE of public utility economics is replete with discussions of the monopoly phenomenon which is characteristic of firms operating in utility industries. There has been much analysis devoted to the question of pricing utility services sold by natural monopolies under conditions of decreasing long-run average costs.' With decreasing costs, as demand increases, there are incentives for a firm to expand to increase profits. Under these conditions the profit goals of the firm and the social goals of the regulatory commission coincide, since lower average costs can be translated, in part at least, into lower rates to consumers by a commission. There has been, however, very little discussion of the pricing and regulatory problems of natural monopolies which have increasing long run average costs, if such a thing exists.2 It is obvious that in situations in which the market

Urban Growth Patterns and the Cost of Local Telephone Service

Urban Growth Patterns and the Cost of Local Telephone Service