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Competition and mergers in networks with call externalities

E. Baranes and L. Flochel

Cahiers du LASER (LASER Working Papers) from LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1

Abstract: This paper considers a model of two interconnected networks with different qualities. There are call externalities in the sense that consumers value calls they send and receive. Networks compete in two part tariffs. We show that call externalities create private incentives for each competitor to charge low access prices. This result moderates the risk of tacit collusion when competitors can freely negotiate their access charges. We also analyze the case of a merger between the two networks and give conditions under which the merger can be welfare improving.

Pages: 50 pages
Date: 2003
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