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Benefits and Pitfalls of Network Interconnection

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  • Nicholas S. Economides
  • Glenn A. Woroch

Abstract

This paper assesses the private and social incentives for disjoint networks to interconnect under various ownership structures. Terms of interconnection are derived for a noncooperative equilibrium. We find that networks mutually profit from interconnection when it creates new services that did not exist beforehand, but also when it creates services that compete directly with existing ones. Given the opportunity to move first, an integrated network will choose not to foreclose its non-integrated rivals. Generally we find that when two or more networks contribute components to a service, double marginalization reduces industry profit and consumer surplus. For this reason, divestiture often harms consumers as well as lowering network profits. Competitive supply of gateway services reduces profit and surplus, but individual networks profit by selling off these facilities to a third party. In contrast, an integrated network will not voluntarily divest its end-to-end service. Compulsory divestiture may inflict serious harm, not only on owners of the integrated network, but on consumers as well.

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Bibliographic Info

Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 92-31.

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Date of creation: Nov 1992
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Handle: RePEc:ste:nystbu:92-31

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Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/
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References

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  1. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December.
  2. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  3. Church, J. & Gandal, N., 1992. "Integration, Complementary Products and Variety," Papers 3-92, Tel Aviv.
  4. Hugo Sonnenschein, 1968. "The Dual of Duopoly Is Complementary Monopoly: or, Two of Cournot's Theories Are One," Journal of Political Economy, University of Chicago Press, vol. 76, pages 316.
  5. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  6. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  7. Donnenfeld, Shabtai & White, Lawrence J, 1990. "Quality Distortion by a Discriminating Monopolist: Comment," American Economic Review, American Economic Association, vol. 80(4), pages 941-45, September.
  8. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  9. Joskow, P.L., 1989. "Regulatory Failure, Regulatory Reform And Structural Change In The Electric Power Industry," Working papers 516, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer.
  11. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring.
  12. Bittlingmayer, George, 1990. "Efficiency and entry in a simple airline network," International Journal of Industrial Organization, Elsevier, vol. 8(2), pages 245-257, June.
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Cited by:
  1. Giovannetti, Emanuele, 2002. "Interconnection, differentiation and bottlenecks in the Internet," Information Economics and Policy, Elsevier, vol. 14(3), pages 385-404, September.
  2. Blankart, Charles B. & Knieps, Gunter, 1995. "Market-oriented open network provision," Information Economics and Policy, Elsevier, vol. 7(3), pages 283-296, September.
  3. Nicholas Economides, 1997. "The Economics of Networks," Industrial Organization 9701002, EconWPA.
  4. Klodt, Henning, 2003. "Das Telekommunikationsgesetz vor der Novellierung," Open Access Publications from Kiel Institute for the World Economy 3014, Kiel Institute for the World Economy (IfW).
  5. Giovannetti, E., 2003. "‘How Different is Wireless Access? Implications for Internet Mergers," Cambridge Working Papers in Economics 0307, Faculty of Economics, University of Cambridge.
  6. Laura Baraldi, 2004. "Esternalita' Di Rete: Una Rassegna," Working Papers 12_2004, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  7. Brunekreeft, Gert, 1997. "Open access vs. common carriage in electricity supply," Energy Economics, Elsevier, vol. 19(2), pages 225-238, May.
  8. Rossitsa Rousseva, 2004. "Innovation Networks – an Environment for Knowledge Accumulation and Creatiîn of Innovations by Interactive Learning," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 73-89.
  9. Toker Doganoglu & Yair Tauman, 1996. "Network Competition with Reciprocal Proportional Access Charge Rules," Industrial Organization 9611001, EconWPA, revised 14 Nov 1996.

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