This section discusses the task of setting prices for network operators and service providers. Click on the links below for information on:
Pricing refers to the task of setting either a single price for an increment of service, or of determining a range within which that price should fall. This means determining both the minimum acceptable price (the price floor) and the maximum acceptable price (the price ceiling).
The price for an increment of service should be set based on forward-looking costs. That is because the prime consideration in pricing is the value of the resources that will be used to produce the increment of service, specifically:
- The mix of technologies needed to produce the increment of service,
- The prices of input resources, and
- The future economic depreciation rates and cost of capital that will apply.
In other words, the price for an increment of service must at least cover the incremental cost of that increment. The incremental cost of the service determines the minimum acceptable price for the service.
In order to determine a range of reasonable (and subsidy free) prices, regulators must also identify the maximum acceptable price. This is usually the stand alone cost of the relevant increment of service. With free entry into the industry, no supplier could charge a price higher than the stand alone cost without encouraging other suppliers to enter the market. (Note that, if the firm has no shared or common fixed costs, the incremental cost will be equal to the stand alone cost.)
In practice, it is very difficult to reliably estimate the stand alone cost of services provided by a multiple-service firm, such as a telecommunications operator. However, it is possible to determine whether a multiple-service firm is charging more than the maximum acceptable prices for one or more of its services, using incremental cost information. The rule for ensuring that prices for all of a firm’s services do not exceed stand alone costs is:
Provided that the firm just breaks even, the price of every service it provides must be no lower than the TSLRIC of that service.
A network operator cannot recover its total costs if it prices all of its services at exactly their respective TSLRICs. In order to recover legitimate total costs network operators must mark up their prices above TSLRIC. For a discussion of ways to determine the level of such mark-ups click here.
RELATED INFORMATION
Single- and Multiple-Service Firms
Pricing Principles for the ICT Sector
Determining Mark Ups Over TSLRIC