Creamskimming and Competition

Abstract:     
The concept of “creamskimming” arises with regularity in the law of regulated industries. As a rhetorical weapon, the term “creamskimming” readily conjures images of the sort of putatively destructive competition that regulatory commissions are charged with patrolling. As a result, allegations of creamskimming have become a standard weapon in the legal arsenal of incumbent firms seeking to resist competitive entry. At an extreme, incumbent firms will characterize all forms of competitive entry as creamskimming. Sound regulatory responses to these allegations therefore depend on a proper understanding of the creamskimming concept.

This article proposes a definition of creamskimming that will help state and federal regulatory agencies distinguish genuine objections to proposed competitive entry from reflexive (and often improper) efforts to shield incumbent firms from competition. “Creamskimming” should be defined as “the practice of targeting only the customers that are the least expensive and most profitable for the incumbent firm to serve, thereby undercutting the incumbent firm’s ability to provide service throughout its service area.” Moreover, regulatory approaches to this practice should make clear that creamskimming can take place only where a competitive firm proposes to serve only a portion of an incumbent firm’s service area. In other words, when a competitive entrant proposes to serve an incumbent’s entire service area, creamskimming by definition cannot occur.

Keywords: creamskimming, universal service, competition, regulation, regulated industries, telecommunications

Working Paper Series