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A Retail Benchmarking Approach to Efficient Two-Way Access Pricing: Termination-Based Price Discrimination with Elastic Subscription Demand

We study how access pricing affects network competition when consumers' subscription demand is elastic and networks compete with non-linear prices and can use termination-based price discrimination. In the case of a fixed per minute termination charge, our model generalizes the results of Gans and King (2001), Dessein (2003) and Calzada and Valletti (2008). We show that a reduction of the termination charge below cost has two opposing effects: it softens competition and it helps to internalize network externalities. The former reduces consumer surplus while the latter increases it. Firms always prefer termination charge below cost, either to soften competition or to internalize the network effect. The regulator will favor termination below cost only when this boosts market penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase subscription without distorting call volumes. Furthermore, we show that an informed regulator can even implement the first-best outcome by using this approach.

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File URL: http://www.netinst.org/Hurkens_Jeon_08-41.pdf
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Paper provided by NET Institute in its series Working Papers with number 08-41.

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Length: 31 pages
Date of creation: Nov 2008
Date of revision: Nov 2008
Handle: RePEc:net:wpaper:0841
Contact details of provider: Web page: http://www.NETinst.org/

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  1. Laffont, Jean-Jacques & Marcus, Scott & Rey, Patrick & Tirole, Jean, 2003. " Internet Interconnection and the Off-Net-Cost Pricing Principle," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 370-90, Summer.
  2. Doh-Shin Jeon & Sjaak Hurkens, 2007. "A Retail Benchmarking Approach to Efficient Two-Way Access Pricing," Working Papers 324, Barcelona Graduate School of Economics.
  3. Wouter Dessein, 2000. "Network Competition in Nonlinear Pricing," CIG Working Papers FS IV 00-22, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  4. 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.
  5. Gans, J.S. & King, S.P., 2000. "Mobile Network Competition, Customer Ignorance and Fixed-to-Mobile Call Prices," Department of Economics - Working Papers Series 734, The University of Melbourne.
  6. Cambini, Carlo & Valletti, Tommaso, 2003. "Investments and Network Competition," CEPR Discussion Papers 3829, C.E.P.R. Discussion Papers.
  7. Jong-Hee Hahn, 2000. "Network Competition and Interconnection with Heterogeneous Subscribers," Keele Department of Economics Discussion Papers (1995-2001) 2000/11, Department of Economics, Keele University.
  8. Doh-Shin Jeon & Jean-Jacques Laffont & Jean Tirole, 2004. "On the Receiver-Pays Principle," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 85-110, Spring.
  9. Benjamin E. Hermalin & Michael L. Katz, 2004. "Sender or Receiver: Who Should Pay to Exchange an Electronic Message?," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 423-447, Autumn.
  10. 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.
  11. Dessein, Wouter, 2004. "Network competition with heterogeneous customers and calling patterns," Information Economics and Policy, Elsevier, vol. 16(3), pages 323-345, September.
  12. Michael Carter & Julian Wright, 1999. "Interconnection in Network Industries," Review of Industrial Organization, Springer, vol. 14(1), pages 1-25, February.
  13. Michael Carter & Julian Wright, 2003. "Asymmetric Network Interconnection," Review of Industrial Organization, Springer, vol. 22(1), pages 27-46, February.
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