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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-30, January.
  2. Sjaak Hurkens & Ángel L. López, 2010. "Mobile Termination, Network Externalities, and Consumer Expectations," UFAE and IAE Working Papers 812.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. 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.
  4. Lopez, Angel & Rey, Patrick, 2009. "Foreclosing Competition through Access Charges and Price Discrimination," TSE Working Papers 09-056, Toulouse School of Economics (TSE), revised Feb 2012.
  5. Sjaak Hurkens & Doh-Shin Jeon, 2009. "Mobile termination and mobile penetration," Economics Working Papers 1166, Department of Economics and Business, Universitat Pompeu Fabra.
  6. Doh-Shin Jeon & Sjaak Hurkens, 2007. "A Retail Benchmarking Approach to Eficient Two-Way Access Pricing," UFAE and IAE Working Papers 717.07, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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  8. 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.
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  12. 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.
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  15. repec:dgr:kubtil:2004010 is not listed on IDEAS
  16. 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.
  17. 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.
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