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

Sjaak Hurkens and Doh-Shin Jeon

No 08-41, Working Papers from NET Institute

Abstract: 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.

Keywords: Networks; Access Pricing; Interconnection; Regulation; Telecommunications (search for similar items in EconPapers)
JEL-codes: D4 K23 L51 L96 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2008-11, Revised 2008-11
New Economics Papers: this item is included in nep-com, nep-law, nep-mic, nep-mkt, nep-net and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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