Network Interconnection in Telecommunications

Mark Armstrong

Economic Journal, 1998, vol. 108, issue 448, 545-64

Abstract: This paper discusses industries such as telecommunications where firms each have their own customers and must interconnect with other firms to provide a comprehensive service. Two scenarios are considered: (1) the case of a symmetric, unregulated industry and (2) the case of an industry with a dominant, regulated incumbent. In the first, provided there is sufficient product differentiation, it is shown that firms agree to set interconnection charges above associated costs in order to obtain the joint profit-maximizing outcome. In the second, a formula for the welfare-maximizing interconnection charge is dented. Relations with the 'efficient component pricing rule' are discussed.

Date: 1998
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