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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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
Contact details of provider:
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)
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.:
- Dessein, Wouter, 2003.
" Network Competition in Nonlinear Pricing,"
RAND Journal of Economics,
The RAND Corporation, vol. 34(4), pages 593-611, Winter.
- Wouter Dessein, 2000. "Network Competition in Nonlinear Pricing," CIG Working Papers, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) FS IV 00-22, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
- Cambini, Carlo & Valletti, Tommaso, 2003.
"Investments and Network Competition,"
CEPR Discussion Papers
3829, C.E.P.R. Discussion Papers.
- Hahn, Jong-Hee, 2004.
"Network competition and interconnection with heterogeneous subscribers,"
International Journal of Industrial Organization, Elsevier,
Elsevier, vol. 22(5), pages 611-631, May.
- Jong-Hee Hahn, 2000. "Network Competition and Interconnection with Heterogeneous Subscribers," Keele Department of Economics Discussion Papers (1995-2001), Department of Economics, Keele University 2000/11, Department of Economics, Keele University.
- Laffont, Jean-Jacques & Marcus, Scott & Rey, Patrick & Tirole, Jean, 2003.
" Internet Interconnection and the Off-Net-Cost Pricing Principle,"
RAND Journal of Economics,
The RAND Corporation, vol. 34(2), pages 370-90, Summer.
- 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.
- Jean-Jacques Laffont, 2001. "Internet Interconnection and the Off-Net-Cost Pricing Principle," Theory workshop papers, UCLA Department of Economics 357966000000000085, UCLA Department of Economics.
- Doh-Shin Jeon & Jean-Jacques Laffont & Jean Tirole, 2004.
"On the Receiver-Pays Principle,"
RAND Journal of Economics,
The RAND Corporation, vol. 35(1), pages 85-110, Spring.
- Doh-Shin Jeon & Sjaak Hurkens, 2007.
"A Retail Benchmarking Approach to Efficient Two-Way Access Pricing,"
324, Barcelona Graduate School of Economics.
- Doh-Shin Jeon & Sjaak Hurkens, 2007. "A retail benchmarking approach to efficient two-way access pricing," Economics Working Papers 1055, Department of Economics and Business, Universitat Pompeu Fabra.
- Doh-Shin Jeon & Sjaak Hurkens, 2007. "A Retail Benchmarking Approach to Eficient Two-Way Access Pricing," UFAE and IAE Working Papers, Unitat de Fonaments de l'AnÃ lisi EconÃ²mica (UAB) and Institut d'AnÃ lisi EconÃ²mica (CSIC) 717.07, Unitat de Fonaments de l'AnÃ lisi EconÃ²mica (UAB) and Institut d'AnÃ lisi EconÃ²mica (CSIC).
- 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.
- Michael Carter & Julian Wright, 1999. "Interconnection in Network Industries," Review of Industrial Organization, Springer, Springer, vol. 14(1), pages 1-25, February.
- Dessein, Wouter, 2004. "Network competition with heterogeneous customers and calling patterns," Information Economics and Policy, Elsevier, vol. 16(3), pages 323-345, September.
- Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, Springer, vol. 22(1), pages 27-46, February.
- Anderson, Simon P & De Palma, Andre, 1992. "The Logit as a Model of Product Differentiation," Oxford Economic Papers, Oxford University Press, vol. 44(1), pages 51-67, January.
- Gans, J.S. & King, S.P., 2000.
"Mobile Network Competition, Customer Ignorance and Fixed-to-Mobile Call Prices,"
Department of Economics - Working Papers Series, The University of Melbourne
734, The University of Melbourne.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Nicholas Economides).
If references are entirely missing, you can add them using this form.