Cross-Subsidization in Telecommunications1

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The Telecommunications Act and FCC and state commission orders have made the proper consideration of cross-subsidization increasingly important. This article briefly surveys the economics literature on cross-subsidization. Caveats regarding the application of the theory to telecommunications, including cross-elastic effects, zero economic profit assumptions, and mistaken identification of loop costs as common production costs, are discussed. The patterns of cross-subsidy and claims of their existence in the industry are considered. The FCC's recent orders are discussed in the context of the relevant economics literature.

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