| Summary: | Current universal service policy in the telecommunications industry aims to provide available, affordable and accessible telecommunications services to all citizens. The economic rationale of this policy is network externalities. Network externalities refer to the benefit of all users in a network derived from a subsequent network expansion. To maximize network externalities, three network expansion approaches are investigated: improving penetration rates, the market structure and interconnection. Current universal service policy is primarily focused on the first approach, while the importance of the market structure, interconnection and their interaction in network expansion is often neglected. As the economic perspective is concerned, network externalities are the ultimate concern in the provision of universal service. The dynamics of these three network expansion approaches determines the effects of network expansion and the outcome of universal service. This paper applies the logic of network externalities to investigate the dynamics of these three network expansion approaches and their policy implications in developing countries' provision of universal service. Explicit funding and allocating mechanisms to improve penetration rates and a market structure with symmetrically vertical-integrated competition are recommended. As well, the importance of economic growth in relation to telecommunications development is presented.
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