Network Competition in Nonlinear Pricing

Wouter Dessein ()

RAND Journal of Economics, 2003, vol. 34, issue 4, 593-611

Abstract: Previous research, assuming linear pricing, has argued that telecommunications networks may use a high access charge as an instrument of collusion. I show that this conclusion is difficult to maintain when operators compete in nonlinear pricing: (i) As long as subscription demand is inelastic, profits can remain independent of the access charge, even when customers are heterogeneous and networks engage in second-degree price discrimination. (ii) When demand for subscriptions is elastic, networks may increase profits by agreeing on an access charge below marginal cost (relative to cost-based access pricing). Welfare is typically increased by setting the access charge above marginal cost. Copyright 2003 by the RAND Corporation.

Date: 2003
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