Regulatory Pricing Rules To Neutralize Network Dominance
New York University - Leonard N. Stern School of Business - Department of Economics
Fuqua School - Duke University; Duke University - Department of Economics
Glenn A. Woroch
University of California, Berkeley
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.
Number of Pages in PDF File: 21
JEL Classification: L1, D4working papers series
Date posted: May 6, 1997
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.265 seconds