eti- The general drive world-wide is towards pricing which is related to tive stage the number of new entrants grows rapidly, forcing costs, and the ONP proposals specify that tariffs should be 'cost down the price of the service, until it reaches an equilibrium, oriented.' The problem is that whereas it is relative easy to find the the margin obtained by each of the remaining suppliers being cost of a network it is not so easy to accurately determine the cost low enough not to encourage new entrants or further price cuts. of providing a service over this network. This is primarily because Eventually the product or service will reach obsolescence, the network is shared between several services, and there are prob- being replaced by a new service. The number of suppliers left lems associated with allocating overheads, such as administration will decline, and as this starts to happen the price of the service, and research costs, which can account for a third to half the total to the few customers still requiring it, may actually increase for costs. a short time before falling back, until eventually the service is The most common method of cost allocation is to use fully totally discontinued. absorbed accounting, where all the costs from the previous year are allocated to the different products or services, rather than trying to predict what the future costs are likely to be. Clearly this is not the best method since costs can vary considerably from one year to the next. If the PTO treats its whole business as a profit centre then cross- subsidies will occur between services. However it is important that each service is treated as a profit centre SO that the true costs for any service are known. It is then possible to determine how much profit is being made by that service, and to respond more effectively to price changes by competitors. A large element of any cost is the interconnect charges (also called access charges) between suppliers, especially on international lines. Pre-competition Post-competition Obsolesce