Price Competition under Universal Service Obligations

In industries like telecom, postal services or energy provision, universal service obligations (uniform price and universal coverage) are often imposed on one market participant. Universal service obligations are likely to alter firms' strategic behavior in such competitive markets. In this paper we show that, depending on the entrant's market coverage and the degree of product differentiation, the Nash equilibrium in prices involves either pure or mixed strategies. We show that the pure strategy market sharing equilibrium, as identified by Valletti et al. (2002) defines a lower bound on the level of equilibrium prices.