Cover: Local Telephone Costs and the Design of Rate Structures

Local Telephone Costs and the Design of Rate Structures

Published 1981

by Bridger M. Mitchell

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Most of the variable costs of local telephone service are due to providing capacity sufficient to meet the maximum volume of calling which occurs during a small number of busy hours. As a result, a uniform average-cost price at all hours may be less efficient than a flat-rate tariff which charges nothing per call, even if metering were costless. Because capacity is distributed throughout the network and used jointly by different calls, optimal peak-load prices may be positive when demand is below the maximum level, and the highest rate need not occur at the hour of peak demand. Realistic rate structure can have only a limited number of separate prices. An efficient rate structure will combine hours and routes that have similar marginal costs and demand elasticities.

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