Discussion Papers

Ingo Vogelsang*

Die räumliche Preisdifferenzierung im Sprachtelefondienst - wettbewerbs- und regulierungspolitische Implikationen
Nr. 217 / Februar 2001


Geographic price differentiation is a pressing topic in Germany, because it could be a necessary consequence of competition in the local telephone network. In the opinion of the author, no fundamental legal hurdles or economic considerations prevent its introduction. This judgement does not, however, preclude the use of dampening measures of competition policy, price regulation, universal service and possibly social policy.

The U.S. experience in geographic price differentiation is only partially applicable to Germany and thus, should not be copied. In other European countries, the attitudes toward geographic price differentiation vary. In the U.K. for example, Oftel still insists on geographically uniform prices for telephone lines sold to end users, but in principle allows BT geographic deaveraging of unbundled local loops.

The current study analyses the consequences of unified tariffs and geographic price differentiation for the cases of both pure infrastructure competition and mixed infrastructure/service competition. Geographically unified tariffs are shown to lead to cream skimming in metropolitan areas and to the collapse of competition in rural areas. Geographic price differentiation should, therefore, hold for services sold to end users as well as for inputs sold to competitors, especially for the unbundled local loop. The price differentiation could increase the geographic size of telecommunications markets. This should decrease average market power.

Geographic price differentiation is fairer than geographically uniform prices insofar as, under the former, poor city dwellers no longer have to subsidise rich farmers. Geographically uniform tariffs are an unfocused and potentially costly tool of distribution policy. Nevertheless, the distributional effects of moving from unified to geographically differentiated tariffs should be carefully analysed and aided by economic policies. Possible negative effects could be reduced through optional tariffs that associate high monthly charges with low usage charges in high-density areas and lower monthly charges with high usage charges in low-density areas. In addition, universal service subsidies could reduce prices and losses of providers in remote rural areas.

In theory, geographic price differentiation could be introduced with the tools of price cap regulation for end users or for unbundled local loops. In practice, however, the relevant geographic regions for differentiation would have to be defined by the regulator, and the differentiation would first have to be introduced on a case-by-case basis.

Only German language version available.

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