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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 EconWPA in its series Industrial Organization with number 9411005.

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Date of creation: 23 Nov 1994
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Handle: RePEc:wpa:wuwpio:9411005

Note: 37pp; postscript file, compressed; keywords: integrated networks, networks
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  1. Church, J. & Gandal, N., 1992. "Integration, Complementary Products and Variety," Papers 3-92, Tel Aviv.
  2. Dixit, Avinash K., 1978. "A Model of Duopoly Suggesting a Theory of Entry Barriers," The Warwick Economics Research Paper Series (TWERPS) 125, University of Warwick, Department of Economics.
  3. 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.
  4. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  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.
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  7. 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.
  8. 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.
  9. 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.
  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. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  12. 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.
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Cited by:
  1. Brunekreeft, Gert, 1997. "Open access vs. common carriage in electricity supply," Energy Economics, Elsevier, vol. 19(2), pages 225-238, May.
  2. 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.
  3. Giovannetti, Emanuele, 2002. "Interconnection, differentiation and bottlenecks in the Internet," Information Economics and Policy, Elsevier, vol. 14(3), pages 385-404, September.
  4. Toker Doganoglu & Yair Tauman, 1996. "Network Competition with Reciprocal Proportional Access Charge Rules," Industrial Organization 9611001, EconWPA, revised 14 Nov 1996.
  5. 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).
  6. Blankart, Charles B. & Knieps, Gunter, 1995. "Market-oriented open network provision," Information Economics and Policy, Elsevier, vol. 7(3), pages 283-296, September.

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