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Promoting network competition by regulating termination charges

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  • Hurkens, Sjaak
  • Jeon, Doh-Shin

Abstract

This paper contributes to the policy debate about the optimal termination charge when penetration rates are explicitly taken into account. Although lowering termination charges towards cost leads to more efficient usage, its impact on consumer surplus is ambiguous since it induces an increase in fixed subscription fee through the so-called waterbed effect. We show that a reduction in termination charge below cost has two opposing effects on consumer surplus: it softens competition but also helps to internalize network externalities. Hence, it can decrease or increase penetration, depending on whether or not the first effect dominates the second. We show that the first effect dominates the second when networks are weak substitutes or the penetration rate is high.

Suggested Citation

  • Hurkens, Sjaak & Jeon, Doh-Shin, 2012. "Promoting network competition by regulating termination charges," International Journal of Industrial Organization, Elsevier, vol. 30(6), pages 541-552.
  • Handle: RePEc:eee:indorg:v:30:y:2012:i:6:p:541-552
    DOI: 10.1016/j.ijindorg.2012.06.002
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    References listed on IDEAS

    as
    1. Hurkens, Sjaak & Jeon, Doh-Shin, 2009. "Mobile termination and mobile penetration," IESE Research Papers D/816, IESE Business School.
    2. Sjaak Hurkens & Angel L. Lopez, 2010. "Mobile Termination, Network Externalities, and Consumer Expectations," Working Papers 441, Barcelona Graduate School of Economics.
    3. de Bijl, Paul W. J. & Peitz, Martin, 2004. "Dynamic regulation and entry in telecommunications markets: a policy framework," Information Economics and Policy, Elsevier, vol. 16(3), pages 411-437, September.
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    7. 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.
    8. Gans, Joshua S. & King, Stephen P., 2001. "Using 'bill and keep' interconnect arrangements to soften network competition," Economics Letters, Elsevier, vol. 71(3), pages 413-420, June.
    9. Doh-Shin Jeon & Sjaak Hurkens, 2007. "A retail benchmarking approach to efficient two-way access pricing," Economics Working Papers 1055, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Mark Armstrong & Julian Wright, 2009. "Mobile Call Termination," Economic Journal, Royal Economic Society, vol. 119(538), pages 270-307, June.
    11. Dessein, Wouter, 2003. " Network Competition in Nonlinear Pricing," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 593-611, Winter.
    12. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    13. Anderson, Simon P & De Palma, Andre, 1992. "The Logit as a Model of Product Differentiation," Oxford Economic Papers, Oxford University Press, vol. 44(1), pages 51-67, January.
    14. Ángel L. López & Patrick Rey, 2009. "Foreclosing Competition through Access Charges and Price Discrimination," Working Papers 2009.99, Fondazione Eni Enrico Mattei.
    15. Jullien, Bruno & Rey, Patrick & Sand-Zantman, Wilfried, 2009. "Mobile Call Termination Revisited," TSE Working Papers 10-198, Toulouse School of Economics (TSE), revised Aug 2010.
    16. Doh-Shin Jeon & Sjaak Hurkens, 2008. "A retail benchmarking approach to efficient two-way access pricing: no termination-based price discrimination-super-†," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 822-849.
    17. 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.
    18. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-564, May.
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    Citations

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    Cited by:

    1. Hoernig, Steffen, 2014. "Competition between multiple asymmetric networks: Theory and applications," International Journal of Industrial Organization, Elsevier, vol. 32(C), pages 57-69.
    2. Vogelsang Ingo, 2013. "The Endgame of Telecommunications Policy? A Survey," Review of Economics, De Gruyter, vol. 64(3), pages 193-270, December.
    3. Choi, Jay Pil & Jeon, Doh-Shin & Kim, Byung-Cheol, 2012. "Internet Interconnection and Network Neutrality," TSE Working Papers 12-355, Toulouse School of Economics (TSE).
    4. Sjaak Hurkens & Angel L. Lopez, 2014. "Who should pay for two-way interconnection?," Working Papers 774, Barcelona Graduate School of Economics.
    5. 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.
    6. Lee, Dongyeol, 2015. "Regulating termination charges in asymmetric oligopolies," Information Economics and Policy, Elsevier, vol. 32(C), pages 16-28.
    7. Jay Pil Choi & Doh-Shin Jeon & Byung-Cheol Kim, 2015. "Net Neutrality, Business Models, and Internet Interconnection," American Economic Journal: Microeconomics, American Economic Association, vol. 7(3), pages 104-141, August.
    8. Ángel L. López & Patrick Rey, 2016. "Foreclosing Competition Through High Access Charges and Price Discrimination," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 436-465, September.

    More about this item

    Keywords

    Mobile penetration; Termination charge; Networks; Interconnection; Regulation; Telecommunications;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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