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Promoting network competition by regulating termination charges

  • Hurkens, Sjaak
  • Jeon, Doh-Shin

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.

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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 30 (2012)
Issue (Month): 6 ()
Pages: 541-552

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Handle: RePEc:eee:indorg:v:30:y:2012:i:6:p:541-552
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  1. Joan Calzada & Tommaso M. Valletti, 2008. "Network Competition and Entry Deterrence," Economic Journal, Royal Economic Society, vol. 118(531), pages 1223-1244, 08.
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  5. Lopez, Angel L. & Rey, Patrick, 2009. "Foreclosing competition through access charges and price discrimination," IESE Research Papers D/801, IESE Business School.
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  8. Sjaak Hurkens and Ángel L. López, 2010. "Mobile Termination, Network Externalities, and Consumer Expectations," Working Papers 441, Barcelona Graduate School of Economics.
  9. 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.
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  11. 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.
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  13. Wouter Dessein, 2000. "Network Competition in Nonlinear Pricing," CIG Working Papers FS IV 00-22, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  14. 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.
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  16. de Bijl, P.W.J. & Peitz, M., 2004. "Dynamic Regulation and Entry in Telecommunications Markets : A Policy Framework," Discussion Paper 2004-010, Tilburg University, Tilburg Law and Economic Center.
  17. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
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