ECO 436 Industry Seminar Dr. David G. Loomis Illinois State University

Telecommunications Costs and Pricing

I. LEC Costs – Depends on n distribution of subscriber loop lengths, n frequency of busy-hour calling, and n technology. – Fixed vs. Variable

Three approaches to estimating: – Econometric Models – Accounting Data – Engineering models

Econometric Models Perl and Falk Rohlfs - C&P of DC Shin and Ying - translog cost function

Accounting Data – misleading due to separations

Engineering Models n Gabel and Kennet n Mitchell n FCC/BCPM Models

II. Local rates bear little relationship to costs. – What would happen if priced in line with costs? – Equity considerations – Network externality

III. LD Costs and Rates – Over 40% of IXC’s revenues go to LECs through access charges – Complex pricing systems with discount plans.

IV. Access Charges – Part of local charges should be recovered from LD rates – Two costs - NTS /TS local network costs – Two ways to recover costs - SLC and access rates

Access Charges – Bypass – Changes over time