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Regulatory Pricing Policies to Neutralize Network Dominance

Author

Listed:
  • Nicholas Economides

    (Stern School of Business, New York University)

  • Giuseppe Lopomo

    (Stern School of Business, New York University)

  • Glenn Woroch

    (University of California, Berkeley)

Abstract

This paper evaluates the effectiveness of several pricing rules intended to promote entry into a network industry dominated by an incumbent carrier. Drawing on the work of Cournot and Hotelling, we develop a model of competition between two interconnected networks. In a symmetric equilibrium, the price of cross-network calls exceeds the price of internal calls. This "calling circle discount" tends to "tip" the industry to a monopoly equilibrium as would a network externality. By equalizing charges for terminating calls, reciprocity eliminates differences between internal and cross-network prices and makes monopoly less likely. Imputation counteracts an incentive by the dominant network to "price squeeze" a rival by eliminating differences in the wholesale price of termination and the implicit price for internal use. By increasing profits of rival networks and increasing their subscribers' surplus, imputation supports additional entry. Finally, an unbundling rule reduces termination fees charged by a dominant network that was engaging in pure bundling. Again, entry will be facilitated as rival networks offer potential subscribers a more attractive rate schedule.

Suggested Citation

  • Nicholas Economides & Giuseppe Lopomo & Glenn Woroch, 1997. "Regulatory Pricing Policies to Neutralize Network Dominance," Industrial Organization 9612003, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpio:9612003
    Note: Type of Document - PDF/PostScript; prepared on IBM PC ; to print on HP; pages: 18; figures: separate but included after page 18 in the pdf and PostScript file. Forthcoming in Industrial and Corporate Change
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    References listed on IDEAS

    as
    1. Nicholas Economides & Giuseppe Lopomo & Glenn Woroch, 1997. "Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing," Industrial Organization 9701001, University Library of Munich, Germany.
    2. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-653, October.
    3. Tardiff, Timothy J., 1995. "Effects of presubscription and other attributes on long-distance carrier choice," Information Economics and Policy, Elsevier, vol. 7(4), pages 353-366, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Nicholas Economides, 2003. "Telecommunications Regulation: An Introduction," Working Papers 03-22, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Nicholas Economides, 2006. "Competition Policy in Network Industries: An Introduction," Chapters, in: Dennis W. Jansen (ed.), The New Economy and Beyond, chapter 5, Edward Elgar Publishing.
    3. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
    4. Nicholas Economides, 2004. "US Telecommunications Today, October 2002," Industrial Organization 0407007, University Library of Munich, Germany.
    5. Gilo, David & Spiegel, Yossi, 2004. "Network interconnection with competitive transit," Information Economics and Policy, Elsevier, vol. 16(3), pages 439-458, September.
    6. Nicholas Economides, 1998. "U.S. Telecommunications Today," Working Papers 98-04, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Nicholas Economides, 1999. "U.S. Telecommunications Today, April 1999," Working Papers 99-09, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Hahn, Jong-Hee, 2003. "Nonlinear pricing of telecommunications with call and network externalities," International Journal of Industrial Organization, Elsevier, vol. 21(7), pages 949-967, September.
    9. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, University Library of Munich, Germany.
    10. Knittel, Christopher R. & Stango, Victor, 2011. "Strategic incompatibility in ATM markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2627-2636, October.
    11. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.

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    More about this item

    Keywords

    two-way networks; interconnection; reciprocity; imputation; unbundling;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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