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A Retail Benchmarking Approach to Efficient Two-way Access Pricing: Two-Part Tariffs

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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 two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under competition in linear prices, derived by Jeon (2005), but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under the class of rules. Therefore, the regulator can choose one among the rules to pursue additional objectives such as consumer surplus, network coverage or investment: in particular, we show that the regulator can achieve static and dynamic efficiency at the same time.

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File URL: http://www.netinst.org/Jeon-Hurkens_07-11.pdf
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Bibliographic Info

Paper provided by NET Institute in its series Working Papers with number 07-11.

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Length: 27 pages
Date of creation: Sep 2007
Date of revision: Sep 2007
Handle: RePEc:net:wpaper:0711

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Web page: http://www.NETinst.org/

Related research

Keywords: Networks; Access Pricing; Interconnection; Competition Policy; Telecommunications; Investment; Two-part Tariff;

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  1. 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.
  2. Dessein, Wouter, 2004. "Network competition with heterogeneous customers and calling patterns," Information Economics and Policy, Elsevier, vol. 16(3), pages 323-345, September.
  3. Nicholas Economides & Lawrence J. White, 1997. "Access and Interconnection Pricing: How Efficient is the Efficient Component Pricing Rule?," Industrial Organization 9701003, EconWPA.
  4. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  5. David S. Sibley & Michael J. Doane & Michael A. Williams & Shu-Yi Tsai, 2004. "Pricing Access to a Monopoly Input," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(4), pages 541-555, October.
  6. Michael Carter & Julian Wright, 1999. "Interconnection in Network Industries," Review of Industrial Organization, Springer, vol. 14(1), pages 1-25, February.
  7. Gans, J.S. & King, S.P., 2000. "Mobile Network Competition, Customer Ignorance and Fixed-to-Mobile Call Prices," Department of Economics - Working Papers Series 734, The University of Melbourne.
  8. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
  9. 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.
  10. 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.
  11. 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.
  12. Wouter Dessein, 2000. "Network Competition in Nonlinear Pricing," CIG Working Papers FS IV 00-22, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  13. Sue Mialon, 2007. "Pricing access in network competition," Journal of Regulatory Economics, Springer, vol. 31(1), pages 109-123, February.
  14. Jean-Jacques Laffont, 2001. "Internet Interconnection and the Off-Net-Cost Pricing Principle," Theory workshop papers 357966000000000085, UCLA Department of Economics.
  15. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
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