5.6 Tariff Rebalancing

Historically, telecommunications operators and regulators have set prices for network access as low as possible. Prices for other services, such as long distance calls, have been kept high to subsidize low access prices.

The rationale behind such policies was to encourage customers to join the network, to realize network externalities. In practice, however, subscribership in many developing economies has been extremely low. It is questionable whether low network access prices have in fact led to economic gains.[1]

Whatever the benefits from subsidizing access prices, economists agree that rebalancing tariffs can produce significant economic gains. Table 1 sets out estimates of economic gains from tariff rebalancing from four separate studies.

A policy of rebalancing seeks to increase access prices, and reduce prices for services that have traditionally subsidized low access prices. The objective is to ensure that the price for each service reflects the underlying cost of providing that service.

Tariff rebalancing can improve social welfare by:

• Stimulating demand for services such as long distance calling,
• Providing improved signals to actual and potential service providers to invest in network access technologies, and
• Improving incentives for competitors to compete for a broad range of customers.

At the same time, increased network access prices under tariff rebalancing generally have a relatively small impact on overall subscribership levels. This is because demand for network access is not very responsive to changes in price. In addition, low prices for usage can stimulate demand for access, helping to mitigate the effects of increased prices for access.

Table 1: Estimates of Welfare Gains from Tariff Rebalancing

While the economic benefits of rate rebalancing are clear from a theoretical point of view and empirical evidence supports the existence of these benefits, rate rebalancing has been a very difficult policy to implement.  The gains of rate rebalancing are spread across a large group of individuals—those who make many calls and have moderate to high levels of income—while the costs of the policy usually fall upon a small group of consumers that can be organized easily to apply pressure on policymakers.   There are several tools policymakers can use to mitigate the pernicious effects of rate rebalancing, however, including:

• Avoid a flash-cut rate rebalancing program where the full subsidy is removed instantaneously and instead implement rate rebalancing over several years;
• Create specially targeted subsidies for those users who may be in jeopardy of dropping off the network in response to rate rebalancing.  Target subsidies can include a monthly discount for certain low-income or low-use customers. 
  

Endnotes:

[1] For example, see Agustin J. Ros and Aniruddha Banerjee, “Telecommunications privatization and tariff rebalancing: evidence from Latin America,” Telecommunications Policy 24 (2000) 233-252.

[2] See Crandall, Robert and Leonard Waverman, Talk is Cheap: The Promise of Regulatory Reform in North American Telecommunications, pp. 90-91.

[3] Munoz’ study computed the welfare gains from a 20 percent increase in local rates accompanied by a profit-neutralizing fall of 7 percent in national rates. See Teresa Garin Munoz, “Demand for National Telephone Traffic in Spain from 1985-1989: An Econometric Study using Provincial Panel Data”, Information Economics and Policy 8 (1996) 51-73.

[4] See Lewis J. Perl, "Economic Consequences of Competition in Telecommunications," paper presented at the International Telecommunications Society Seventh Bi-Annual Conference, Cambridge, Massachusetts, July 1988, p. 10.

[5] Griffin, James M. and Thomas H. Mayor, “The Welfare Gains from Efficient Pricing of Telecommunications Services”, Journal of Law and Economics, October 1987, pp. 465-87.