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A Retail Benchmarking Approach to Efficient Two-Way Access Pricing

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  • Doh-Shin Jeon
  • Sjaak Hurkens
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    Abstract

    We study a retail benchmarking approach to determine access prices for interconnected networks. Instead of considering fixed access charges as in the existing literature, we study access pricing rules that determine the access price that network i pays to network j as a linear function of the marginal costs and the retail prices set by both networks. In the case of competition in linear prices, we show that there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of the underlying demand conditions. In the case of competition in two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under linear prices but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under this class of rules. Therefore, the regulator (or the competition authority) can choose one among the rules to pursue additional objectives such as consumer surplus, network coverage or investment: for instance, we show that both static and dynamic efficiency can be achieved at the same time.

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    Bibliographic Info

    Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 324.

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    Date of creation: Oct 2007
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    Handle: RePEc:bge:wpaper:324

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    Related research

    Keywords: Networks; Access Pricing; Interconnection; Competition Policy; Telecommunications; Investment;

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    References

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    1. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
    2. Cambini, Carlo & Valletti, Tommaso, 2003. "Investments and Network Competition," CEPR Discussion Papers 3829, C.E.P.R. Discussion Papers.
    3. Sue Mialon, 2007. "Pricing access in network competition," Journal of Regulatory Economics, Springer, vol. 31(1), pages 109-123, February.
    4. Laffont, Jean-Jacques & Marcus, Scott & Rey, Patrick & Tirole, Jean, 2001. "Internet Interconnection and the Off-Net-Cost Pricing Principle," IDEI Working Papers 130, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. Dessein, Wouter, 2003. " Network Competition in Nonlinear Pricing," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 593-611, Winter.
    6. 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.
    7. Gans, Joshua S. & King, Stephen P., 2000. "Mobile network competition, customer ignorance and fixed-to-mobile call prices," Information Economics and Policy, Elsevier, vol. 12(4), pages 301-327, December.
    8. Doh-Shin Jeon, 2005. "A simple access pricing rule to achieve the Ramsey outcome for interconnected networks," Economics Working Papers 808, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2005.
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