Allocation of NTS(Non-Traffic Sensitive) Deficit in Telecommunications

The cost in telecommunications industry can be divided into NTS (Non-Traffic Sensitive) cost and TS (Traffic Sensitive) cost. In principle, consumers bear the NTS cost by paying subscription charge and the TS cost by paying per-call charge. It is well known that when one considers network externality. it is socially optimal to charge subscription charge lower than the NTS cost and per-call charge higher than the TS cost. The resulting NTS deficit has been conventionally compensated by the profits from the TS sector. If competition is introduced under this situation, it will necessarily be introduced into the TS sector (cf. cream skimming). In this case, the regulator confronts the question of whether new entrants should cross subsidize incumbent's NTS deficit. If so, on what basis could it be shared among new entrants? Currently in Korea, NTS deficit is allocated amongst new entrants in proportion to access traffic. However, this method has been under controversy. This paper explores the question of the optimal NTS deficit allocation. The conclusions are; first, it is appropriate for new entrants to bear the deficit; second, allocation according to demand elasticity and traffic is more efficient than the current method; and third, when the price is fixed by the regulator, allocation based on the traffic is justifiable.