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The Role of Social Networks on Regulation in the Telecommunication Industry

Author

Listed:
  • Rodrigo Harrison

    () (Instituto de Economía. Pontificia Universidad Católica de Chile.)

  • Gonzalo Hernández
  • Roberto Muñoz.

Abstract

This paper studies the welfare implications of equilibrium behavior in a market characterized by competition between two interconnected telecommunication firms, subject to constraints: the customers belong to a social network. It also shows that social networks matter because equilibrium prices and welfare critically depend on how people are socially related. Next, the model is used to study effectiveness of alternative regulatory schemes. The standard regulated environement, in which the authority defines interconnection ac cess charges as being equal to marginal costs and final prices are left to the market, is considered as a benchmark. Then, we focus on the performance of two different regulatory interventions. First, access prices are set below marginal costs to foster competition. Second, switching costs are reduced to intensify competition. The results show that the second strategy is more efective to obtain equilibrium prices closer to Ramsey's level.

Suggested Citation

  • Rodrigo Harrison & Gonzalo Hernández & Roberto Muñoz., 2009. "The Role of Social Networks on Regulation in the Telecommunication Industry," Documentos de Trabajo 350, Instituto de Economia. Pontificia Universidad Católica de Chile..
  • Handle: RePEc:ioe:doctra:350
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    File URL: http://www.economia.uc.cl/docs/dt_350.pdf
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    More about this item

    Keywords

    Access charges; social networks; random regular graphs;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D60 - Microeconomics - - Welfare Economics - - - General

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