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Customer or Complementor? Intercarrier Compensation with Two‐Sided Benefits

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  • Benjamin E. Hermalin
  • Michael L. Katz

Abstract

Both senders and receivers derive benefits from telecommunications messages. Hence, consumers’ sending and receiving decisions generate external effects. We explore whether intercarrier compensation (i.e., an access charge) can induce carriers to set retail prices that internalize these external effects. We find that an access charge can induce constrained‐efficient sending and receiving prices for exchanging messages across networks, taking the sum of these prices as given, but cannot induce the correct sum. We also show that the internalizing role for the access charge can imply a nonzero access charge is efficient even in highly symmetrical situations, and that the efficient access charge may be positive or negative.

Suggested Citation

  • Benjamin E. Hermalin & Michael L. Katz, 2011. "Customer or Complementor? Intercarrier Compensation with Two‐Sided Benefits," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 379-408, June.
    • Handle: RePEc:bla:jemstr:v:20:y:2011:i:2:p:379-408
    DOI: 10.1111/j.1530-9134.2011.00292.x
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    References listed on IDEAS

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    1. 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.
    2. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: II. Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 38-56, Spring.
    3. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    4. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring.
    5. Michael L. Katz, 2006. "Observable Contracts as Commitments: Interdependent Contracts and Moral Hazard," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 685-706, September.
    6. Berger Ulrich, 2005. "Access Charges in the Presence of Call Externalities," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-16, January.
    7. Patrick Degraba, 2003. "Efficient Intercarrier Compensation for Competing Networks When Customers Share the Value of A Call," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(2), pages 207-230, June.
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    Cited by:

    1. Hoernig, Steffen, 2012. "The Breakdown of Connectivity Breakdowns," CEPR Discussion Papers 9189, C.E.P.R. Discussion Papers.
    2. Hurkens, Sjaak & López, Ángel L., 2014. "Who Should Pay for Two-way Interconnection?," IESE Research Papers D/1102, IESE Business School.
    3. Steffen Hoernig & Marc Bourreau & Carlo Cambini, 2014. "Fixed-mobile integration," Journal of Regulatory Economics, Springer, vol. 45(1), pages 57-74, February.
    4. Steffen Hoernig & Roman Inderst & Tommaso Valletti, 2014. "Calling circles: network competition with nonuniform calling patterns," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 155-175, March.
    5. Harbord, David & Hoernig, Steffen, 2010. "Welfare Analysis of Regulating Mobile Termination Rates in the UK (with an Application to the Orange/T-Mobile Merger)," MPRA Paper 21515, University Library of Munich, Germany.
    6. Hoernig, Steffen, 2016. "Going beyond duopoly: Connectivity breakdowns under receiving party pays," Information Economics and Policy, Elsevier, vol. 36(C), pages 1-9.
    7. Vogelsang Ingo, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, De Gruyter, vol. 64(3), pages 193-270, December.
    8. Greenstein Shane, 2012. "Concentration in Internet Access and Entrepreneurial Truncation of Innovation," Capitalism and Society, De Gruyter, vol. 7(1), pages 1-33, November.
    9. David Harbord & Steffen Hoernig, 2015. "Welfare Analysis of Regulating Mobile Termination Rates in the U.K," Journal of Industrial Economics, Wiley Blackwell, vol. 63(4), pages 673-703, December.
    10. Tommaso Majer & Michele Pistollato, 2016. "Calling vs. Receiving Party Pays," Competition and Regulation in Network Industries, , vol. 17(2), pages 150-180, June.

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