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Promoting network competition by regulating termination charges

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  • Hurkens, Sjaak
  • Jeon, Doh-Shin
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    Abstract

    This paper contributes to the policy debate about the optimal termination charge when penetration rates are explicitly taken into account. Although lowering termination charges towards cost leads to more efficient usage, its impact on consumer surplus is ambiguous since it induces an increase in fixed subscription fee through the so-called waterbed effect. We show that a reduction in termination charge below cost has two opposing effects on consumer surplus: it softens competition but also helps to internalize network externalities. Hence, it can decrease or increase penetration, depending on whether or not the first effect dominates the second. We show that the first effect dominates the second when networks are weak substitutes or the penetration rate is high.

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    Bibliographic Info

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

    Volume (Year): 30 (2012)
    Issue (Month): 6 ()
    Pages: 541-552

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    Handle: RePEc:eee:indorg:v:30:y:2012:i:6:p:541-552

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

    Related research

    Keywords: Mobile penetration; Termination charge; Networks; Interconnection; Regulation; Telecommunications;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Sjaak Hurkens & Ángel L. López, 2010. "Mobile Termination, Network Externalities, and Consumer Expectations," Working Papers 441, Barcelona Graduate School of Economics.
    2. Bijl, P.W.J. de & Peitz, M., 2004. "Dynamic Regulation and Entry in Telecommunications Markets: A Policy Framework," Discussion Paper 2004-010, Tilburg University, Tilburg Law and Economic Center.
    3. Gans, Joshua S. & King, Stephen P., 2001. "Using 'bill and keep' interconnect arrangements to soften network competition," Economics Letters, Elsevier, vol. 71(3), pages 413-420, June.
    4. Lopez, Angel L. & Rey, Patrick, 2009. "Foreclosing competition through access charges and price discrimination," IESE Research Papers D/801, IESE Business School.
    5. Mark Armstrong & Julian Wright, 2009. "Mobile Call Termination," Economic Journal, Royal Economic Society, vol. 119(538), pages F270-F307, 06.
    6. Wouter Dessein, 2000. "Network Competition in Nonlinear Pricing," CIG Working Papers FS IV 00-22, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    7. Anderson, Simon P & De Palma, Andre, 1992. "The Logit as a Model of Product Differentiation," Oxford Economic Papers, Oxford University Press, vol. 44(1), pages 51-67, January.
    8. Hurkens, Sjaak & Lopez, Angel, 2010. "Mobile termination, network externalities, and consumer expectations," IESE Research Papers D/850, IESE Business School.
    9. Doh-Shin Jeon & Sjaak Hurkens, 2007. "A retail benchmarking approach to efficient two-way access pricing," Economics Working Papers 1055, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-30, January.
    11. Hurkens, Sjaak & Jeon, Doh-Shin, 2009. "Mobile Termination and Mobile Penetration," IDEI Working Papers 575, Institut d'Économie Industrielle (IDEI), Toulouse.
    12. Joan Calzada & Tommaso M. Valletti, 2008. "Network Competition and Entry Deterrence," Economic Journal, Royal Economic Society, vol. 118(531), pages 1223-1244, 08.
    13. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
    14. Doh-Shin Jeon & Sjaak Hurkens, 2008. "A retail benchmarking approach to efficient two-way access pricing: no termination-based price discrimination-super-†," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 822-849.
    15. Sjaak Hurkens & Doh-Shin Jeon, 2009. "Mobile Termination and Mobile Penetration," Working Papers 393, Barcelona Graduate School of Economics.
    16. Steffen Hoernig & Roman Inderst & Tommaso Valletti, 2011. "Calling Circles: Network Competition with Non-Uniform Calling Patterns," CEIS Research Paper 206, Tor Vergata University, CEIS, revised 04 Jul 2011.
    17. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
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    Citations

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    Cited by:
    1. Ingo Vogelsang, 2013. "The Endgame of Telecommunications Policy? A Survey," CESifo Working Paper Series 4545, CESifo Group Munich.
    2. Choi, Jay & Jeon, Doh-Shin & Kim, Byung-Cheol, 2012. "Internet Interconnection and Network Neutrality," TSE Working Papers 12-355, Toulouse School of Economics (TSE).
    3. Hoernig, Steffen, 2014. "Competition between multiple asymmetric networks: Theory and applications," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 57-69.

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