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Service Bundling and the Role of Access Charge in the Broadband Internet Service Market

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  • SHIM, Sunghee
  • OH, Jungsuk
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    Abstract

    Using the classical Hotelling model, this paper analyzes the incentive for a CATV service provider to bundle broadband internet services when entering the broadband internet services market. In addition, the effect of such service bundling by an entrant on the market incumbent with ownership over existing bottleneck facilities is analyzed. Furthermore, an access charge that maximizes social welfare is explored and determined. Two cases are considered: in the first case, the market is fully covered; and in the second case, the market is not fully covered. With full market coverage, an entrant has an incentive for service bundling if there is sufficient service differentiation. The entrant's bundling strategy reduces the incumbent's profit. In this case, the total social welfare is independent of the level of the access charge and only has an effect of redistributing the net surplus between consumers and the incumbent. With partial market coverage, the entrant has an incentive for service bundling at a low access charge. The incumbent's profit increases if the access charge is higher than the cost of access provisioning. In this case, the total social welfare is dependent on the level of access charge and the welfare maximizing access charge is less than the unit cost of providing access.

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    File URL: http://mpra.ub.uni-muenchen.de/3553/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3553.

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    Date of creation: Sep 2006
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    Handle: RePEc:pra:mprapa:3553

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    Related research

    Keywords: cable TV; broadband internet service; bundling; access charge; convergence;

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    1. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, December.
    2. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-98, March.
    3. Foros, Oystein & Hansen, Bjorn, 2001. "Competition and compatibility among Internet Service Providers," Information Economics and Policy, Elsevier, vol. 13(4), pages 411-425, December.
    4. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(448), pages 545-64, May.
    5. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-50, June.
    6. Denicolo, Vincenzo, 2000. "Compatibility and Bundling with Generalist and Specialist Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 48(2), pages 177-88, June.
    7. Schmalensee, Richard, 1982. "Commodity Bundling by Single-Product Monopolies," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 67-71, April.
    8. Jay Pil Choi, 2004. "Tying and innovation: A dynamic analysis of tying arrangements," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 114(492), pages 83-101, 01.
    9. Michael Carter & Julian Wright, 1999. "Interconnection in Network Industries," Review of Industrial Organization, Springer, vol. 14(1), pages 1-25, February.
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    Cited by:
    1. Markos Tselekounis & Dimitris Varoutas & Drakoulis Martakos, 2012. "On the social optimality of make-or-buy decisions," Journal of Regulatory Economics, Springer, vol. 41(2), pages 238-268, April.
    2. Edmond Baranes, 2006. "Bundling and Collusion on Communications Markets," Working Papers 06-17, NET Institute, revised Oct 2006.

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