Optimal Pricing of Local Telephone Service.
Analyzes the economic effects of usage-sensitive pricing (USP), under which telephone companies are proposing to charge subscribers for both the number and duration of calls, instead of a flat monthly rate. Constructs a mathematical model of the demand for residential telephone service, calibrates it to existing data, and quantifies the effects of changing from flat-rate to two-part tariffs under which subscribers would pay a monthly rate plus a per-call charge. USP will attract new subscribers, especially low-income households, and all consumer groups will make some reductions in their calls. Optimal two-part tariffs can increase the social welfare from local telephone service by some 9 percent; larger gains are likely if USP is applied uniformly to both residential and business subscribers and if tariffs include peak-load rates. In the residential sector alone, peak-load usage-sensitive tariffs should yield net welfare gains on the order of $500 million per year. 68 pp. Bibliog.