A Retail Benchmarking Approach to Efficient Two-Way Access Pricing: Termination-Based Price Discrimination with Elastic Subscription Demand
AbstractWe study how access pricing affects network competition when consumers' subscription demand is elastic and networks compete with non-linear prices and can use termination-based price discrimination. In the case of a fixed per minute termination charge, our model generalizes the results of Gans and King (2001), Dessein (2003) and Calzada and Valletti (2008). We show that a reduction of the termination charge below cost has two opposing effects: it softens competition and it helps to internalize network externalities. The former reduces consumer surplus while the latter increases it. Firms always prefer termination charge below cost, either to soften competition or to internalize the network effect. The regulator will favor termination below cost only when this boosts market penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase subscription without distorting call volumes. Furthermore, we show that an informed regulator can even implement the first-best outcome by using this approach.
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Bibliographic InfoPaper provided by NET Institute in its series Working Papers with number 08-41.
Length: 31 pages
Date of creation: Nov 2008
Date of revision: Nov 2008
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Web page: http://www.NETinst.org/
Networks; Access Pricing; Interconnection; Regulation; Telecommunications;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-11 (All new papers)
- NEP-COM-2008-11-11 (Industrial Competition)
- NEP-LAW-2008-11-11 (Law & Economics)
- NEP-MIC-2008-11-11 (Microeconomics)
- NEP-MKT-2008-11-11 (Marketing)
- NEP-NET-2008-11-11 (Network Economics)
- NEP-REG-2008-11-11 (Regulation)
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