Nicholas Economides (Stern School of Business, New York University) Giuseppe Lopomo (Stern School of Business, New York University) Glenn Woroch (University of California, Berkeley)
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We discuss the effects of strategic commitments and of network size in the process of setting interconnection fees across competing networks. We also discuss the importance of the principles of reciprocity and imputation of interconnection charges on market equilibria. Reciprocity means that both networks charge the same for interconnection. Imputation means that a network charges its customers as much as it charges customers of the other network for the same service. Assuming that each consumer cannot subscribe to more than one network, we begin by analyzing a game of strategic symmetry where the two networks choose all prices simultaneously. Second, we allow a dominant network to set the interconnection fee before the opponent network can set its prices. This results in a price-squeeze on the rival network. Third, we show that the imposition of a reciprocity rule eliminates the strategic power of the first mover. Under reciprocity, one network sets the common interconnection fee at cost, and the equilibrium prices for final services are lower than in the two previous games without reciprocity. Moreover, prices under reciprocity obey the principle of imputation. In the long run, consumers subscribe to one of the two networks. Typically, there is a multiplicity of equilibria, including corner equilibria, where all consumers subscribe to the same network. However, under reciprocity, there are no corner equilibria.
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Length: 30 pages Date of creation: 20 Jan 1997 Date of revision: Handle: RePEc:wpa:wuwpio:9701001
Note: Type of Document - PDF/PostScript; prepared on IBM PC; to print on HP; pages: 30; figures: included Contact details of provider: Web page: http://129.3.20.41
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Find related papers by JEL classification: L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance D4 - Microeconomics - - Market Structure and Pricing
References listed on IDEAS 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.:
Nicholas Economides, 1995.
"The Economics of Networks,"
Working Papers
94-24, New York University, Leonard N. Stern School of Business, Department of Economics, revised Sep 1995.
[Downloadable!]
Nicholas Economides, 1993.
"Mixed Bundling in Duopoly,"
Working Papers
93-29, New York University, Leonard N. Stern School of Business, Department of Economics.
[Downloadable!]
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