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By Organisation for Economic Co-Operation and Development

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In the case where the new service of the entrant does not compete with the service of the incumbent,22 the principles set out here show us that the existing retail tariffs of the incumbent for its services are irrelevant. The access price for the new service should be based on its marginal cost, with (if necessary) a mark-up to provide a contribution towards fixed costs based on its own elasticity of demand. If this access price is so high as to induce stand-alone entry into local loop services, it may be necessary to either lower the access price or to introduce some other instrument, such as a tax on the services provided with local loops.

In the extreme case, if corresponding final services are a perfect substitute for the final services of the monopolist then the complex Ramsey formula reduces to the simple ECPR formula mentioned above. This is shown in the appendix. Principle 3 (again): If marginal cost pricing yields insufficient revenue to the monopolist then both access and final prices must be raised above marginal cost according to the Ramsey formula, or taxes and subsidies must support the differences between the final prices, determined by the Ramsey formula, and the access prices.

In some cases a regulated firm that is not allowed to discriminate may not be able to earn enough revenue to survive at all. Suppose that a monopolist produces two goods at zero marginal cost, and a joint fixed cost of $500. Demand for each good is as follows – the maximum price that consumers are prepared to pay for good A is $10. At any price less than $10, consumers purchase 50 units. In the case of good B, the maximum price consumers are prepared to pay is $2 and will purchase exactly 150 units if the price is less than $2.

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