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216.73.217.86
216.73.217.86
An Economic Analysis of ' Option Tariffs ' in Telecommunications Services
Myung Bae Yeom
UCI I410-ECN-0102-2008-320-001697935

The objective of this paper is to search for the theoretical validity of OT(Option Tariff) in an economic sense and to give an explanation for the practical success of OT strategies employed by many telecom companies. From the social point of view, OT definitely benefits consumers but sometimes it hurts firms` profits. Under equal weight criterion OT system is desirable only if current MT(Mandatory Tariff) differ from the marginal cost. Social welfare can necessarily be improved by offering an additional OT with a usage-fee approaching the marginal cost. When the social weight imposed upon consumer`s benefit is much heavier than that upon producer`s benefit, OT can be acceptable at the sacrifice of firms` profits. If the goal of a telecom company is not in the profit maximization but in the expansion of market share, OT strategy will be successful because the demand for telecom service will increase under OT system. Even though the policy maker (or social planner) does not have the perfect information about demand and cost, there is no reason to forbid any firm from introducing OT strategies as long as it wishes, since it will enhance the social welfare anyway.

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