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A Retail Benchmarking Approach to Efficient Two-Way Access Pricing

Author

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  • Doh-Shin Jeon
  • Sjaak Hurkens

Abstract

We study a retail benchmarking approach to determine access prices for interconnected networks. Instead of considering fixed access charges as in the existing literature, we study access pricing rules that determine the access price that network i pays to network j as a linear function of the marginal costs and the retail prices set by both networks. In the case of competition in linear prices, we show that there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of the underlying demand conditions. In the case of competition in two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under linear prices but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under this class of rules. Therefore, the regulator (or the competition authority) can choose one among the rules to pursue additional objectives such as consumer surplus, network coverage or investment: for instance, we show that both static and dynamic efficiency can be achieved at the same time.

Suggested Citation

  • Doh-Shin Jeon & Sjaak Hurkens, 2007. "A Retail Benchmarking Approach to Efficient Two-Way Access Pricing," Working Papers 324, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:324
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    References listed on IDEAS

    as
    1. Doh-Shin Jeon, 2005. "A simple access pricing rule to achieve the Ramsey outcome for interconnected networks," Economics Working Papers 808, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2005.
    2. Gans, Joshua S. & King, Stephen P., 2000. "Mobile network competition, customer ignorance and fixed-to-mobile call prices," Information Economics and Policy, Elsevier, vol. 12(4), pages 301-327, December.
    3. Tommaso M. Valletti & Carlo Cambini, 2005. "Investments and Network Competition," RAND Journal of Economics, The RAND Corporation, pages 446-468.
    4. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, pages 579-605.
    5. Tommaso M. Valletti & Carlo Cambini, 2005. "Investments and Network Competition," RAND Journal of Economics, The RAND Corporation, pages 446-468.
    6. 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.
    7. Dessein, Wouter, 2003. " Network Competition in Nonlinear Pricing," RAND Journal of Economics, The RAND Corporation, pages 593-611.
    8. Dietmar Harhoff, 1998. "Are there Financing Constraints for R&D and Investment in German Manufacturing Firms," Annals of Economics and Statistics, GENES, pages 421-456.
    9. Sue Mialon, 2007. "Pricing access in network competition," Journal of Regulatory Economics, Springer, pages 109-123.
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    Citations

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    Cited by:

    1. Tilman Klumpp & Xuejuan Su, 2015. "Strategic Investment under Open Access: Theory and Evidence," Journal of Industrial Economics, Wiley Blackwell, vol. 63(3), pages 495-521, September.
    2. Hurkens, Sjaak & Jeon, Doh-Shin, 2009. "Mobile termination and mobile penetration," IESE Research Papers D/816, IESE Business School.
    3. Stennek, Johan & Tangerås, Thomas, 2006. "Competition vs. Regulation in Mobile Telecommunications," Working Paper Series 685, Research Institute of Industrial Economics.
    4. Hurkens, Sjaak & Jeon, Doh-Shin, 2012. "Promoting network competition by regulating termination charges," International Journal of Industrial Organization, Elsevier, pages 541-552.
    5. Johan Stennek & Thomas TangerŒs, 2008. "Intense Network Competition," Working Papers 08-36, NET Institute, revised Sep 2008.
    6. Hoernig, Steffen, 2014. "Competition between multiple asymmetric networks: Theory and applications," International Journal of Industrial Organization, Elsevier, pages 57-69.
    7. Stühmeier, Torben, 2012. "Roaming and investments in the mobile internet market," Telecommunications Policy, Elsevier, pages 595-607.
    8. Hoernig, Steffen, 2014. "Competition between multiple asymmetric networks: Theory and applications," International Journal of Industrial Organization, Elsevier, pages 57-69.
    9. Kjetil Andersson & Øystein Foros & Bjørn Hansen, 2016. "Empirical Evidence on the Relationship between Mobile Termination Rates and Firms' Profits," Scandinavian Journal of Economics, Wiley Blackwell, pages 129-149.
    10. Tilman Klumpp & Xuejuan Su, 2010. "Open Access and Dynamic Efficiency," American Economic Journal: Microeconomics, American Economic Association, pages 64-96.
    11. Sjaak Hurkens & Doh-Shin Jeon, 2008. "A Retail Benchmarking Approach to Efficient Two-Way Access Pricing: Termination-Based Price Discrimination with Elastic Subscription Demand," Working Papers 08-41, NET Institute, revised Nov 2008.
    12. Kjetil Andersson & Øystein Foros & Bjørn Hansen, 2016. "Empirical Evidence on the Relationship between Mobile Termination Rates and Firms' Profits," Scandinavian Journal of Economics, Wiley Blackwell, pages 129-149.

    More about this item

    Keywords

    Networks; access pricing; Interconnection; Competition Policy; Telecommunications; investment;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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