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Competition and mergers in networks with call externalities

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  • Baranes, E.
  • Flochel, L.
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    Abstract

    This paper considers a model of two interconnected networks with different qualities. There are call externalities in the sense that consumers value calls they send and receive. Networks compete in two part tariffs. We show that call externalities create private incentives for each competitor to charge low access prices. This result moderates the risk of tacit collusion when competitors can freely negotiate their access charges. We also analyze the case of a merger between the two networks and give conditions under which the merger can be welfare improving.

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    Bibliographic Info

    Paper provided by LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1 in its series Cahiers du LASER (LASER Working Papers) with number 2003.07.

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    Length: 50 pages
    Date of creation: 2003
    Date of revision:
    Handle: RePEc:mop:lasrwp:2003.07

    Contact details of provider:
    Postal: Université de Montpellier 1, Faculté des Sciences Economiques, LASER, Rue Raymond Dugrand - Espace Richter, CS 79606, 34960 Montpellier Cedex 2, France
    Web page: http://www.laser.univ-montp1.fr
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    References

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    1. Nicholas Economides & Giuseppe Lopomo & Glenn Woroch, 1997. "Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing," Industrial Organization 9701001, EconWPA.
    2. Jong-Hee Hahn, 2000. "Network Competition and Interconnection with Heterogeneous Subscribers," Keele Department of Economics Discussion Papers (1995-2001) 2000/11, Department of Economics, Keele University.
    3. 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.
    4. Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. 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.
    6. Kim, Jeong-Yoo & Lim, Yoonsung, 2001. "An economic analysis of the receiver pays principle," Information Economics and Policy, Elsevier, vol. 13(2), pages 231-260, June.
    7. 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.
    8. 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.
    9. Benjamin E. Hermalin & Michael L. Katz, 2004. "Sender or Receiver: Who Should Pay to Exchange an Electronic Message?," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 423-447, Autumn.
    10. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
    11. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
    12. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
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    Cited by:
    1. 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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