Discussion Papers

Bridger M. Mitchell, Ingo Vogelsang

U.S. Practice of Telecommunications Pricing
Nr. 66 / Mai 1991

Summary

This study provides a comprehensive analysis of the theory and practice of telecommunications pricing. Volume I systematically reviews recent innovations in the theory of pricing and extends results to conditions that characterize telecommunications markets. Volume II examines the implementation of normative pricing theory in selected U.S. telephone tariffs.

Volume I. Chapter 1 suggests a variety of linkages between the normative theory of pricing and markeg practices. In Chapter 2 we examine fundamental technological conditions of producing telecommunications services and the nature of the costs of supplying telephone service. These factors are the backdrop for understanding the basic features of telephone pricing, and research on telecommunications demand and cost structures constitutes an important input for this work.

Part II is devoted to a tour of recent developments in the normative economic theory of tariffs. We first provide an overview of the major types of tariffs and establish the notation and conventions we need (Chapter 3). We then examine, successively, linear tariffs (Chapter 4), nonlinear tariffs (Chapter 5) and cost-based pricing (Chapter 6). This part, especially Chapters 4-6, is the most technical material of the study. It should be accessible to readers with a scientific, engineering, or economics background. Others may prefer to turn immediately to the following, case-study material.

Volume II. Part III surveys the major types of rate structures found in U. S. markets. We discuss governmental regulation and rates for retail services in Chapter 7, and follow this with a more extended examination of optional retail tariffs in Chapter 8. Pricing practices for services sold in volume to larger business and institutional customers are the topic of Chapter 9. Chapter l0 examines rates that one telecommunications carrier charges another for interconnection and transport services. Finally, in Chapter 11 we review "lifeline" and related social tariffs designed to assist selected telephone subscribers.

In Part IV we review the salient theoretical advances in light of American practice and the available evidence of the effectiveness of innovative pricing. An appendix summarizes recent trends in the prices of U. S. telephone services and provided additional technical detail on price cap regulation.

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