Network Competition and the Provision of Universal Service

As providers of basic infrastructure services, telecommunicationsproviders have traditionally been required to provide servicesand to serve customers that would not provide a reasonable returnon investment in an unregulated marketplace. Today there arestill important telecommunications policy goals that are unlikelyto be achieved through competition alone. A successful transitionfrom monopoly to competition requires the development of newmechanisms for achieving these goals that do not impede competitionin services and in geographic areas where it would otherwisebe feasible. This paper examines the problem of providing basictelephone service to low income households in urban areas largeenough to support two or more competing providers of telephoneservice. It shows that there are plausible circumstances underwhich, even without public support, low income households unwillingto pay the cost of connection to the public network will stillbe provided service by telephone companies who want to makethem available to other subscribers willing to pay more. Thiscan happen if there is a mechanism that allows service providersto accurately distinguish between low income and high incomesubscribers.