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Network competition and interconnection with heterogeneous subscribers

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  • Hahn, Jong-Hee

Abstract

This paper considers competition in a telecommunications industry, where heterogeneous consumers have private information about their preferences for telephone service and firms are allowed to use nonlinear tariffs. Networks, which directly compete for customers, are interconnected and pay access charges to one another. In a symmetric equilibrium, each network’s profit-maximising pricing policy generally involves a distortion in call allocation for all types, except when the (reciprocal) access charge is set equal to the call-termination cost. Under certain conditions, however, the resulting per-firm profit is independent of the access charge, and so the networks have no incentive to collude by choosing an access charge higher (or lower) than its cost. In this case, there is no need for regulatory intervention regarding access charges other than to provide a ‘focal point’ by recommending that the networks set access charges equal to the actual call-termination cost. This policy induces the efficient consumption of calls. Key Words : Two-way Networks, Interconnection, Nonlinear Pricing,Telecommunications Policy.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 22 (2004)
Issue (Month): 5 (May)
Pages: 611-631

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Handle: RePEc:eee:indorg:v:22:y:2004:i:5:p:611-631

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Armstrong, M. & Doyle, C. & Vickers, J., 1995. "The access pricing problem: a synthesis," Discussion Paper Series In Economics And Econometrics 9532, Economics Division, School of Social Sciences, University of Southampton.
  2. Michael Carter & Julian Wright, 1999. "Interconnection in Network Industries," Review of Industrial Organization, Springer, vol. 14(1), pages 1-25, February.
  3. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
  4. Nicholas Economides & Giuseppe Lopomo & Glenn Woroch, 2005. "Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing," Working Papers 05-10, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Laffont, Jean-Jacques & Tirole, Jean, 1992. "Access Pricing and Competition," IDEI Working Papers 19, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
  7. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  8. Simon P. Anderson & Stephen Coate, 2005. "Market Provision of Broadcasting: A Welfare Analysis," Review of Economic Studies, Oxford University Press, vol. 72(4), pages 947-972.
  9. Gans, J.S. & King, S.P., 2000. "Using 'Bill and Keep' Interconnect Arrangements to Soften Network Competiti on," Department of Economics - Working Papers Series 739, The University of Melbourne.
  10. repec:eee:ecolet:v:71:y:2001:i:3:p:413-42 is not listed on IDEAS
  11. Wright, Julian, 2002. "Access Pricing under Competition: An Application to Cellular Networks," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 289-315, September.
  12. Armstrong, Mark, 2004. "Network interconnection with asymmetric networks and heterogeneous calling patterns," Information Economics and Policy, Elsevier, vol. 16(3), pages 375-390, September.
  13. Dessein, Wouter, 2003. " Network Competition in Nonlinear Pricing," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 593-611, Winter.
  14. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  15. Jong-Hee Hahn, 2000. "Nonlinear Pricing of Telecommunications with Call and Network Externalities," Keele Department of Economics Discussion Papers (1995-2001) 2000/15, Department of Economics, Keele University, revised Nov 2001.
  16. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
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Citations

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Cited by:
  1. Ingo Vogelsang, 2003. "Price Regulation of Access to Telecommunications Networks," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 830-862, September.
  2. Hurkens, Sjaak & Jeon, Doh-Shin, 2009. "Mobile termination and mobile penetration," IESE Research Papers D/816, IESE Business School.
  3. Sjaak Hurkens & Ángel L. López, 2010. "Mobile Termination, Network Externalities, and Consumer Expectations," UFAE and IAE Working Papers 812.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  4. Jullien, Bruno & Rey, Patrick & Sand-Zantman, Wilfried, 2013. "Termination fees revisited," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 738-750.
  5. Andersson, Kjetil & Foros, Øystein & Hansen, Bjørn, 2012. "Empirical evidence on the relationship between mobile termination rates and firms’ profit," Discussion Papers 2012/10, Department of Business and Management Science, Norwegian School of Economics.
  6. Vikt�ria Kocsis, 2005. "Network Asymmetries and Access Pricing in Cellular Telecommunications," Tinbergen Institute Discussion Papers 05-085/1, Tinbergen Institute.
  7. Hermalin, Benjamin E & Katz, Michael L, 2006. "Customer or Complementor? Intercarrier Compensation with Two-Sided Benefits," Competition Policy Center, Working Paper Series qt9vf0k91t, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  8. repec:dgr:uvatin:2005085 is not listed on IDEAS
  9. Armstrong, Mark & Wright, Julian, 2007. "Mobile call termination in the UK," MPRA Paper 2344, University Library of Munich, Germany.
  10. Sjaak Hurkens & Ángel L. López, 2010. "Mobile Termination, Network Externalities, and Consumer Expectations," Working Papers 441, Barcelona Graduate School of Economics.
  11. Luis López, Ángel, 2011. "Mobile termination rates and the receiver-pays regime," Information Economics and Policy, Elsevier, vol. 23(2), pages 171-181, June.
  12. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
  13. Sue Mialon, 2007. "Pricing access in network competition," Journal of Regulatory Economics, Springer, vol. 31(1), pages 109-123, February.
  14. Edmond Baranes & Laurent Flochel, 2008. "Competition in telecommunication networks with call externalities," Journal of Regulatory Economics, Springer, vol. 34(1), pages 53-74, August.

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