Telecommunications pricing

The last fifteen years have witnessed revolutionary technological and institutional changes in telecommunications. These developments – including fiber-optic cables and digital switches, cellular telephones, longdistance service competition, and the divestiture of the dominant US carrier – are having profound effects on the theory and practice of telecommunications pricing.

The economic theory of pricing has expanded substantially. New and modified methods of pricing natural-monopoly services have been developed, designed to achieve increased economic efficiency and acceptable distributive results. Increasingly, theoretical results have been extended to encompass entry and competitive supply in multiproduct markets.

Innovations in pricing theory, and their translation into ratemaking practice, have been examined systematically for electric power (Berg, 1983; Mitchell, Manning, and Acton, 1978); for telecommunications, a comparable assessment covers developments to about 1980 (Neumann, 1984). Since that time, many of the theoretical advances in pricing have been contributed by economists associated with the telephone sector, and some of these developments are found in Sherman (1989), Spulber (1989a), and Brown and Sibley (1986).

The broad principles of the theoretical literature on pricing are applicable to most regulated industries and public enterprises. However, the implementation of the theory varies significantly across industries. These variations – created by differences in cost, demand, and institutional conditions – call for a study that is devoted to telecommunications ratemaking.

In this volume we systematically review recent innovations in the theory of pricing and extend results to conditions that characterize telecommunications markets. We then examine the implementation of normative pricing theory in selected US telephone tariffs. In the United States telephone services are highly developed, essentially ubiquitous, and in many important markets supplied by several competing firms. Regulatory authority is divided between federal and state governments; as a result tariffs also differ by state.