By Organisation for Economic Co-Operation and Development

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10 This new requirement may conflict with the other principles we have highlighted above. It may not be possible to simultaneously satisfy the other principles above and to prevent entry. For example, “pure” Ramsey pricing may require that the price for a service exceed its stand-alone cost. It may not be possible both to impose efficient Ramsey pricing and to prevent new entry. This conflict between objectives can be overcome by introducing a new instrument. Specifically, what is needed is an instrument that would break the link between the prices charged by the monopolist and the prices faced by consumers.

50 ACCESS PRICING IN TELECOMMUNICATIONS – ISBN 92-64-10592-1 – © OECD 2004 1. THE THEORY OF ACCESS PRICING Box 3. ) Example 2: Suppose a local loop in a certain region costs $120 (including any fixed costs that need to be covered). Suppose that the incumbent telecommunications company charges a two part tariff for telecommunications services – the fixed subscriber charge of the incumbent is $100 and the incumbent’s usage charge per call is $1. Suppose, finally that there are two types of consumers, type A, which comprise 20% of the population which are high users, consuming 60 units of usage and type B (80% of the population) which consume 10 units of usage.

This principle continues to apply even when there is imperfect competition downstream. A primary consequence of imperfect competition downstream is that the final price faced by end-users of the competitors is raised above the marginal cost of providing the service of the competitors – which includes the cost of access. This mark-up above marginal cost is inefficient for the usual reasons (it artificially reduces consumption and distorts consumption in favour of other products). Lowering the access charges relative to the level given by the previous principles can eliminate the price-marginal cost markup on the final services.

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