Broadband Internet access in developing countries: Universal service provision and pricing schemes

Income inequality and the existence of rural areas where access is difficult may mean that the entire population does not have access to a network facility. The reasons are the existence of large sunk costs and low service affordability. The former strongly depends on geography and historical circumstances. The latter is also positively correlated with GDP per capita. We present a model in which consumers' capacity to access broadband Internet facilities is negatively correlated with the price charged by the network owner per consumption capacity unit. We motivate the model by analyzing the South America telecommunication market. In the reference scenario, a natural monopoly operates in both the network and the service provision market. In the liberalized scenario, we assume duopolistic competition in the service provision market between the network owner and a potential entrant firm. We find that network capacity may be maximal depending on the regulation scheme. Accordingly, there is a trade-off between network capacity and retail prices. Moreover, the liberalized structure does not necessarily enhance consumer surplus. Furthermore, competition in the service provision market may reduce social welfare, either due to excessive differentiation or due to a low network capacity.