Telecommunications Pricing: Theory and Practice

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The past decade has witnessed a surge of pricing innovations in the US telecommunications industry. This volume systematically reviews recent innovations in the economic theory of pricing and extends results to conditions that characterize telecommunications markets. It then examines the implementation of normative pricing theory in selected US telephone tariffs. The experience accumulated in the United States provides a rich and diverse data base and a laboratory for examining the practical consequences of pricing innovations.

Throughout this volume the objective is to develop and illuminate the relationships between the normative economic theory of pricing -- with its objectives of social welfare, economic efficiency, and fairness -- and telecommunications pricing as it is practiced by business and regulators. In particular, the new pricing schemes are related to the theory of multiproduct and nonlinear pricing. The book describes the welfare and competitive properties of such pricing schemes and draws conclusions for future pricing problems in the areas of broadband networks and open network architecture. Many of the general theoretical pricing principles and lessons from US pricing experience should prove directly applicable to telecommunications services in other countries and to other industries, including electricity and natural gas supply, air and rail transportation, and postal and parcel services.

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Editorial Reviews

From the Publisher
" excellent survey of the theoretical literature on optimal pricing of utilities (with their own applications to telecommunications) coupled with a very up to date and fascinating discussion of actual pricing policies by local exchange and interexchange carriers. It is an excellent addition to previous books on regulation, but is particularly useful to those who want an overview of the current state of telecommunications economics." Journal of Economic Literature
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Product Details

  • ISBN-13: 9780521416672
  • Publisher: Cambridge University Press
  • Publication date: 10/28/2003
  • Pages: 328
  • Product dimensions: 6.14 (w) x 9.21 (h) x 0.87 (d)

Table of Contents

List of figures
List of tables
I Pricing and Telecommunications
1 Introduction 3
1.1 Telecommunications pricing 3
1.2 Theory and practice 4
1.3 Overview 6
2 Telecommunications production, costs, and pricing 7
2.1 Stylized telecommunications technology 7
2.2 The US context 15
2.3 Major tariff developments 17
II Recent Developments in the Normative Economic Theory of Tariffs
3 Types of tariffs 23
3.1 The context 23
3.2 Normative framework 26
3.3 Overview of tariff types 34
4 Linear tariffs 38
4.1 Marginal-cost prices 38
4.2 Ramsey pricing (demand-oriented tariffs) 43
4.3 Ramsey pricing with competition 48
4.4 Ramsey pricing with consumption externalities 55
4.5 Definition of services 61
4.6 Customer-class pricing 64
4.7 Dynamic pricing 66
4.8 Conclusions 72
5 Nonlinear tariffs 73
5.1 The consumption framework 73
5.2 Two-part tariffs 77
5.3 Two-part tariffs with consumption externalities 81
5.4 Discriminatory two-part tariffs 83
5.5 Smooth nonlinear tariffs 85
5.6 Discrete multipart and optional two-part tariffs 95
5.7 Tying/bundling versus unbundling 105
5.8 Nonlinear tariffs in oligopoly 112
5.9 Second-best piecemeal policy 114
6 Cost-based tariffs 118
6.1 Subsidy-free pricing 118
6.2 Cost-axiomatic pricing 134
6.3 Fully distributed-cost pricing 137
6.4 Special issues of carrier rates 140
6.5 Second-best piecemeal policy revisited 143
III Telephone Rate Structures in the United States
7 Regulation and US retail rates 149
7.1 The impact of regulation on rate setting 149
7.2 Basic US retail rates 156
7.3 Price caps 167
8 Optional calling plans 176
8.1 Theory of optional tariffs reconsidered 176
8.2 Development of AT&T's optional calling plan 188
8.3 Nationwide optional calling plans 194
8.4 FCC guidelines for optional calling plans 199
9 Business bulk-rate tariffs 201
9.1 Local rates 201
9.2 WATS tariffs 202
9.3 800-number services 206
9.4 Virtual private networks 207
9.5 Discounts for bundling 208
9.6 Private lines 210
9.7 Custom tariffs 211
10 Pricing of carrier services 213
10.1 Carrier access rates 213
10.2 Bypass of the local exchange 216
10.3 Incentive effects 216
10.4 Nonlinear pricing of carrier access 221
11 Social tariffs 224
11.1 Telephone penetration 224
11.2 Coals of social tariffs 227
11.3 The history of social tariffs 228
11.4 Description of state programs 230
11.5 The costs of social tariffs 239
11.6 The welfare impact of social tariffs 243
IV Synthesis
12 Synthesis of theory and practice 249
12.1 Lessons from pricing theory 249
12.2 Assessing practice in light of theory 252
12.3 Pricing and the future 258
A US telephone price indexes 264
Bibliography 287
Index 301
Selected list of RAND books 308
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