Most firms in the ICT sector provide multiple services and operate in markets that are very different from a standard model of a perfectly competitive market. When pricing services provided by multiple-service network operators, an alternative set of pricing principles applies:
Pricing Principle 1: In a competitive market, the efficient price of a service provided by a multiple-service operator need not be equal to its TSLRIC. Instead, the efficient price must be equal to the full economic cost of the service which exceeds the TSLRIC.
In perfectly competitive markets, the efficient price is equal to the underlying incremental or marginal cost of producing a service. Pricing Principle 1 recognizes that telecommunications firms are multiple services with substantial shared and common costs. Full economic costs include incremental costs, and an appropriate contribution towards shared and common costs.
Pricing Principle 2: The TSLRIC of each service provided by a multiple-service operator is the price floor for that service; incremental revenue from each service must cover the TSLRIC of that service. However, a price that is equal to the full economic cost of a service will be efficient even if that price is above the TSLRIC.
In perfectly competitive markets, any price above incremental cost is inefficient. Pricing Principle 2 emphasizes that, for network operators, a price that is above incremental cost is not necessarily inefficient.
Pricing Principle 3: The LRIC shall be the price floor for any additional increment of service provided by a multiple-service operator; revenue from each increment of service must at least cover its LRIC.
LRIC is the appropriate price floor because the planned increment of service for which a price is set need not be the entire quantity of the service. However, regulators increasingly use the (average) TSLRIC as the price floor in place of LRIC. The difference between LRIC and TSLIRC is that TSLRIC includes service-specific fixed costs, while LRIC does not. As a result, TSLRIC usually results in a higher price floor.
In the United States, some regulators have established (average) TSLRIC as the price floor for the service as a whole so that the total revenues received from the service must at least equal the service’s TSLRIC. Yet for the price floor for an additional unit of output, regulators have accepted LRIC as the proper price floor.
RELATED INFORMATION
Economic Efficiency and Pricing
Setting the Level and Structure of Prices