Competition between Vertically Integrated Networks: a Generalized Model

Using the Laffont, Rey and Tirole (1998) framework, a model of competition between vertically integrated telecommunications networks in a deregulated environment is developed. Two local operators compete in linear and non linear tariffs (i.e. two-part tariffs) in the subscribers market. In addition, they are integrated downstream in a potentially competitive sector (i.e. long distance sector) where they face competition of other firms which require (one way) access to local networks as an "essential facility". The purpose of the paper is to introduce a "downstream" competition in the usual framework of network competition and to focus on how the one way access charges are set in an oligopolistic market. In a mature phase of the industry, the presence of competition in both local and long distance sectors leads to lower local and long distance tariffs. The strategic role of the two-way and one-way access charges is pointed out, with particular reference to the effect that the reciprocal (two-way) access charge has on competition in the complementary sector. Finally, in case of competition in two-part tariffs, the paper investigates: 1) the asymmetric case in which only one network is integrated; 2) the entry process when the two local networks have different coverage. The results show how the level of the two-way and one-way access charges affects the "level playing field" between networks.