Edited by Michael A. Crew and Paul R. Kleindorfer
Chapter 12: Network Externalities and the USO: A Two-sided Market Approach
François Boldron, Helmuth Cremer, Philippe De Donder, Denis Joram and Bernard Roy 1 INTRODUCTION Externalities and particularly network externalities are among the most prominent arguments used to justify a Universal Service Obligation (USO) in the postal sector. This is an important issue for the future of the postal sector. The very idea of universal service has remained relatively uncontested during the early stages of the liberalization process. More recently, however, the USO in itself has increasingly been questioned. The question is whether the social beneﬁts associated with the USO are signiﬁcant enough to justify its cost and in particular the impediment to competition it often implies. In a recent paper, Cremer et al. (2008) provided an overview of the beneﬁts and costs of the USO in the postal sector. They presented and assessed alternative economic justiﬁcations of the USO. In particular, the issue of network externalities was noted, but only a sketch of the main ideas was provided. The current chapter takes up this issue and provides a more formal and thorough analysis which is inspired by recent developments in the industrial economics literature. Network externalities constitute a classical justiﬁcation of the USO in telecommunications. They arise when the beneﬁts from using a network depend on the number of individuals who are connected to the network. This traditional view relies on a symmetric view of externalities where all subscribers are potential callers and receivers. This view is probably of limited relevance for the...
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