Strategic Interaction under Asymmetric Regulation - Adoption, Usage, and Global Impact of Broadband Technologies - page 31

mobile and wireless) and could service rural con-
sumers more cost-effectively with these technolo-
gies 15 . The process of determining the level and
allocation of the tax has also been problematic.
The complexity of establishing the relevant facts
have combined with other workload pressures at
the Commission, to the extent that delays of up
to three years in levying the liabilities have been
experienced (Howell, 2007). Entrants routinely
challenge the determinations, both via legal and
public media channels. Consequently, the TSO
remains a political issue.
Continued political pressure resulted in a
further review by the TCF in 2008. The govern-
ment's response to the recommendations that the
government meet the costs of the social obligations
from general taxation revenue and that firms be
allowed to contest for the right to provide services
in 'uneconomic' areas is yet to be delivered. How-
ever, as long as the government has social policy
objectives in respect of telecommunications, the
question of how to allocate the costs remains. As
Farrell (1996) identifies, universal service prices
are antithetic to competition and competition is
antithetic to universal service principles. The
New Zealand example illustrates that as long as
the obligation is asymmetrically embodied in
the prices charged by only one participant in the
market, there will be continual strategic interac-
tion between all participants in all of the market,
the courts and the political arena.

from the interaction of 'free local calling' and the
consequences of technological change.

'Free Local Calling', Voice
and Internet Usage

'Free local calling' is a special case of a two-part
tariff, where a single price is charged to cover
both connection to the network and usage of it.
Whereas a classic optimal two-part tariff prices
each component at cost, 'free local calling' requires
connection be priced above cost (a call cannot be
made unless a connection is purchased), and the
surplus used to pay for all costs of usage, which
is priced below cost, at zero. The consequence
is that fewer connections are sold (as the con-
nection price charged rises relative to an optimal
two-part tariff, thereby excluding all users with
a combined value of connection and usage who
would have purchased at the cost-based prices but
not at the flat-rate price), but usage is greater, as
all those purchasing a connection now consume
all calls or call minutes with a positive benefit,
rather than only those where the benefit exceeds
the marginal cost, priced as the usage charge
(Laffont & Tirole, 2002).
The 'free local calling' obligation has had a
profound effect upon patterns of telecommunica-
tions usage in New Zealand. NZIER (2005) finds
that the volume of voice minutes consumed per
account in New Zealand is one of the highest in the
OECD. Howell & Sangekar (2009) find that the
combined volumes of voice minutes and internet
usage per account in New Zealand are five times
those observed in Finland, where two-part tariffs
and cost-based, region-specific (i.e. not universal)
line rental prices prevail.
With the emergence of the internet, first ac-
cessed via dial-up telephony lines, 'free local
calling' offered a consumer welfare boon in those
markets where the tariff structure prevailed. Not
only was a dial-up internet connection 'gifted' with
an extant voice connection, but dial-up internet
access could be consumed up to the point where

THE 'KIWI SHARE' AND
TECHNOLOGICAL CHANGE

Whilst the 'universal service' obligation has led
to tensions regarding the allocation of costs, the
'free local calling' obligation has introduced
further tensions into the New Zealand telecom-
munications market, which have arguably had
a far bigger effect upon shaping firm behaviour
and dynamic sector outcomes. The effects arise