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Network Competition with Reciprocal Proportional Access Charge Rules

Listed author(s):
  • Toker Doganoglu

    (Department of Economics, SUNY Stony Brook)

  • Yair Tauman

    (Department of Economics SUNY Stony Brook and Graduate School of Business Tel-Aviv University)

This paper presents a model of two competing local telecommunications networks, similar in spirit to the model of Laffont, Rey and Tirole(1996). The networks have different attributes which we assume are fixed and the consumers have idiosyncratic tastes for these attributes. The networks are mandated to interconnect and the access charges are determined cooperatively in the first stage. In the second stage, the two network companies are engaged in a price competition to attract consumers. In the third stage, each consumer selects a network and determines the consumption of phone calls. Laffont, Rey and Tirole have shown that except for restrictive scenarios, the local price competition does not result in a pure strategy equilibrium. In this paper, we assume that the two companies choose access charge rules rather than simply access charges. These rules determine the access charges as a function of the future local prices. We show that the family of reciprocal proportional access charge rules generates a pure strategy equilibrium and we discuss its properties.

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Paper provided by EconWPA in its series Industrial Organization with number 9611001.

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Date of creation: 13 Nov 1996
Date of revision: 21 Nov 1996
Handle: RePEc:wpa:wuwpio:9611001
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  1. Laffont, Jean-Jacques & Tirole, Jean, 1994. "Access pricing and competition," European Economic Review, Elsevier, vol. 38(9), pages 1673-1710, December.
  2. Muench, Thomas J., 1988. "Quantum agglomeration formation during growth in a combined economic/gravity model," Journal of Urban Economics, Elsevier, vol. 23(2), pages 199-214, March.
  3. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
  4. Nicholas Economides & Lawrence J. White, 1995. "Access and Interconnection Pricing: How Efficient is the Efficient Component Pricing Rule?," Working Papers 95-04, 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;The Industrial Organization Society, vol. 14(1), pages 1-25, February.
  6. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-256, November.
  7. Nicholas S. Economides & Glenn A. Woroch, 1992. "Benefits and Pitfalls of Network Interconnection," Working Papers 92-31, New York University, Leonard N. Stern School of Business, Department of Economics.
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