Regulatory Pricing Policies to Neutralize Network Dominance

Nicholas S. Economides (), Giuseppe (Pino) Lopomo () and Glenn Woroch
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Glenn Woroch: University of California, Berkeley

Industrial Organization from EconWPA

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.

Keywords: two-way networks; interconnection; reciprocity; imputation; unbundling (search for similar items in EconPapers)
JEL-codes: L1 D4 (search for similar items in EconPapers)
Date: 1997-01-14
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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