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On the definition of affordable prices under universal service obligations

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2004-07
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In this paper, we investigate the social welfare implications of the European and American definition of affordable prices when a country is divided into independent zones. We find that the European definition is always soc ial welfare superior, because it forces to keep lower prices. We also introduce to new defintions of affordable prices. The first definition advocates for a common price for the unprofitable area. We prove that this definition is social welfare superior to the current definitions. In the second definition denote as "yardstick pricing" , we define the affordable prices for the unprofitable areas as a function that does not depende on their own zone profitable area price. We show that yardstick price is more efficient for social welfare when the differences in demand among zones are not very large .
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