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Network Competition and Interconnection with Heterogeneous Subscribers

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Author Info
Jong-Hee Hahn () (Department of Economics University of Keele)

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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.

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Paper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 2000/11.

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Length: 30 pages
Date of creation: Aug 2000
Date of revision:
Publication status: Published in International Journal of Industrial Organization, 2004, vol. 22, issue 5, pages 611-631. [ doi:10.1016/j.ijindorg.2004.01.002 ]
Handle: RePEc:kee:keeldp:2000/11

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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
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Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

References listed on IDEAS
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.:

  1. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January. [Downloadable!] (restricted)
  2. Armstrong, Mark, 2006. "Price discrimination," MPRA Paper 4693, University Library of Munich, Germany. [Downloadable!]
  3. Champsaur, Paul & Rochet, Jean-Charles, 1989. "Multiproduct Duopolists," Econometrica, Econometric Society, vol. 57(3), pages 533-57, May. [Downloadable!] (restricted)
  4. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring. [Downloadable!] (restricted)
  5. Jean-Jacques Laffont & Jean Tirole, 1994. "Access Pricing and Competition," Working papers 94-31, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  6. Michael Carter & Julian Wright, 1999. "Interconnection in Network Industries," Review of Industrial Organization, Springer, vol. 14(1), pages 1-25, February. [Downloadable!] (restricted)
  7. Stole, Lars A, 1995. "Nonlinear Pricing and Oligopoly," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 4(4), pages 529-62, Winter.
  8. Laffont, Jean-Jacques & Rey, Patrick & Tirole, Jean, 1997. "Competition between telecommunications operators," European Economic Review, Elsevier, vol. 41(3-5), pages 701-711, April. [Downloadable!] (restricted)
  9. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
  10. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Blackwell Publishing, vol. 44(2), pages 131-50, June. [Downloadable!] (restricted)
    Other versions:
  11. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: II. Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 38-56, Spring. [Downloadable!] (restricted)
  12. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring. [Downloadable!] (restricted)
  13. Spulber, Daniel F., 1989. "Product variety and competitive discounts," Journal of Economic Theory, Elsevier, vol. 48(2), pages 510-525, August. [Downloadable!] (restricted)
  14. Jonathan Hamilton & Jacques-François Thisse, 1996. "Nonlinear pricing in spatial oligopoly," Review of Economic Design, Springer, vol. 2(1), pages 379-397, December. [Downloadable!] (restricted)
  15. Claudio Mezzetti, 1997. "Common Agency with Horizontally Differentiated Principals," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 323-345, Summer. [Downloadable!] (restricted)
  16. Ivaldi, M. & Martimort, D., 1992. "Competition Under Nonlinear Pricing," Papers 93.288, Toulouse - GREMAQ.
    Other versions:
  17. Oren, Shmuel S. & Smith, Stephen A. & Wilson, Robert B., 1983. "Competitive nonlinear tariffs," Journal of Economic Theory, Elsevier, vol. 29(1), pages 49-71, February. [Downloadable!] (restricted)
  18. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May. [Downloadable!] (restricted)
  19. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 277-311, January.
Full references

Cited by:
(explanations, 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.)

  1. Baranes, E. & Flochel, L., 2003. "Competition and mergers in networks with call externalities," Cahiers du LASER (LASER Working Papers) 2003.07, LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1. [Downloadable!]
  2. Edmond Baranes & Laurent Flochel, 2008. "Competition in telecommunication networks with call externalities," Journal of Regulatory Economics, Springer, vol. 34(1), pages 53-74, August. [Downloadable!] (restricted)
  3. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany. [Downloadable!]
  4. Armstrong, Mark & Wright, Julian, 2008. "Mobile Call Termination," MPRA Paper 2344, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  5. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February. [Downloadable!] (restricted)
  6. Felix Hoeffler, 2006. "Mobile termination and collusion, revisited," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2006_16, Max Planck Institute for Research on Collective Goods. [Downloadable!]
  7. JULLIEN, Bruno & REY, Patrick & SAND-ZANTMAN, Wilfried, 2009. "Mobile Call Termination Revisited," IDEI Working Papers 551, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  8. Israel J. Muñoz & Elena Huergo, 2005. "Entrada y competencia en los servicios de telecomunicaciones," Industrial Organization 0504002, EconWPA. [Downloadable!]
    Other versions:
  9. Rodrigo Harrison & Gonzalo Hernández & Roberto Muñoz., 2009. "The Role of Social Networks on Regulation in the Telecommunication Industry," Documentos de Trabajo 350, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  10. Jean-Jacques Laffont, 2001. "Internet Interconnection and the Off-Net-Cost Pricing Principle," Theory workshop papers 357966000000000085, UCLA Department of Economics. [Downloadable!]
    Other versions:
  11. Joan Calzada & Francesc Trillas, 2005. "The interconnection prices in telecomunications: from theory to practice," Hacienda Pública Española, IEF, vol. 173(2), pages 85-125, June. [Downloadable!]
  12. 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. [Downloadable!]
    Other versions:
  13. Ulrich Berger, 2003. "Two-way interconnection and the collusive role of the access charge," Industrial Organization 0303011, EconWPA. [Downloadable!]
  14. Doh-Shin Jeon & Sjaak Hurkens, 2007. "A Retail Benchmarking Approach to Efficient Two-way Access Pricing: Two-Part Tariffs," Working Papers 07-11, NET Institute, revised Sep 2007. [Downloadable!]
  15. Kaisa Kotakorpi, 2002. "Access Pricing and Competition in Telecommunications," Discussion Papers 283, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  16. Sue Mialon, 2007. "Pricing access in network competition," Journal of Regulatory Economics, Springer, vol. 31(1), pages 109-123, February. [Downloadable!] (restricted)
  17. repec:mop:credwp:03.10.37 is not listed on IDEAS
  18. Doh Shin Jeon & Jean Jacques Laffont & Jean Tirole, 2001. "On the Receiver Pays Principle," Economics Working Papers 561, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  19. Viktoria Kocsis, 2005. "Network Asymmetries and Access Pricing in Cellular Telecommunications," IEHAS Discussion Papers 0513, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
    Other versions:
  20. Herguera-García, Iñigo & Aguilar-Barceló, José G., 2004. "El papel de las tarifas de interconexión en las industrias en red
    [The role of interconnection charges in network industries]    ," MPRA Paper 4733, University Library of Munich, Germany, revised Jan 2004. [Downloadable!]
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