Allocating and funding universal service obligations in a competitive market

We examine, in a network market open to competition, various mechanisms for allocating and funding universal service obligations among agents (rival firms and consumers). The obligations we consider are geographic ubiquity and nondiscrimination. We analyze, from both the efficiency and equity point of views, the respective advantages of a 'restricted-entry' system (where the entrant is not allowed to serve high cost consumers) and a 'pay-or-play' system. We show that pay-or-play regulation always dominates restricted-entry regulation under ubiquity constraint alone. This result no longer holds when the regulator imposes also the nondiscrimination constraint.