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Network Competition and Interconnection with Heterogeneous Subscribers

  • Jong-Hee Hahn

    ()

    (Department of Economics University of Keele)

This paper considers competition in a telecommunications industry, where heterogeneous consumers have private information about their preferences for telephone service and firms are allowed to use nonlinear tariffs. Networks, which directly compete for customers, are interconnected and pay access charges to one another. In a symmetric equilibrium, each network’s profit-maximising pricing policy generally involves a distortion in call allocation for all types, except when the (reciprocal) access charge is set equal to the call-termination cost. Under certain conditions, however, the resulting per-firm profit is independent of the access charge, and so the networks have no incentive to collude by choosing an access charge higher (or lower) than its cost. In this case, there is no need for regulatory intervention regarding access charges other than to provide a ‘focal point’ by recommending that the networks set access charges equal to the actual call-termination cost. This policy induces the efficient consumption of calls. Key Words : Two-way Networks, Interconnection, Nonlinear Pricing,Telecommunications Policy.

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File URL: http://www.keele.ac.uk/depts/ec/wpapers/0011.pdf
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Paper provided by Department of Economics, Keele University in its series Keele Department of Economics Discussion Papers (1995-2001) with number 2000/11.

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Length: 30 pages
Date of creation: Aug 2000
Date of revision:
Publication status: Published in International Journal of Industrial Organization, 2004, vol. 22, issue 5, pages 611-631. [ doi:10.1016/j.ijindorg.2004.01.002 ]
Handle: RePEc:kee:keeldp:2000/11
Contact details of provider: Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
Web page: http://www.keele.ac.uk/depts/ec/cer/
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Order Information: Postal: Department of Economics, Keele University, Keele, Staffordshire ST5 5BG - United Kingdom
Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm Email:


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  1. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
  2. Simon P. Anderson & Stephen Coate, 2003. "Market Provision of Broadcasting: A Welfare Analysis," Virginia Economics Online Papers 358, University of Virginia, Department of Economics.
  3. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
  4. Nicholas Economides & Giuseppe Lopomo & Glenn Woroch, 2005. "Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing," Working Papers 05-10, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Michael Carter & Julian Wright, 1999. "Interconnection in Network Industries," Review of Industrial Organization, Springer, vol. 14(1), pages 1-25, February.
  6. Gans, J.S. & King, S.P., 2000. "Using 'Bill and Keep' Interconnect Arrangements to Soften Network Competiti on," Department of Economics - Working Papers Series 739, The University of Melbourne.
  7. Armstrong, Mark, 1998. "Network Interconnection in Telecommunications," Economic Journal, Royal Economic Society, vol. 108(448), pages 545-64, May.
  8. Jean-Charles Rochet & Jean Triole, 2002. "Platform competition in two sided markets," LSE Research Online Documents on Economics 24929, London School of Economics and Political Science, LSE Library.
  9. Armstrong, Mark, 2004. "Network interconnection with asymmetric networks and heterogeneous calling patterns," Information Economics and Policy, Elsevier, vol. 16(3), pages 375-390, September.
  10. Laffont, Jean-Jacques & Tirole, Jean, 1994. "Access pricing and competition," European Economic Review, Elsevier, vol. 38(9), pages 1673-1710, December.
  11. repec:eee:ecolet:v:71:y:2001:i:3:p:413-42 is not listed on IDEAS
  12. Wright, Julian, 2002. "Access Pricing under Competition: An Application to Cellular Networks," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 289-315, September.
  13. Jong-Hee Hahn, 2000. "Nonlinear Pricing of Telecommunications with Call and Network Externalities," Keele Department of Economics Discussion Papers (1995-2001) 2000/15, Department of Economics, Keele University, revised Nov 2001.
  14. Wouter Dessein, 2000. "Network Competition in Nonlinear Pricing," CIG Working Papers FS IV 00-22, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  15. 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.
  16. Rochet, Jean-Charles & Stole, Lars A, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 277-311, January.
  17. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-50, June.
  18. 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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