Regulatory Pricing Rules to Neutralize Network Dominance

37 Pages Posted: 8 Feb 2010

See all articles by Nicholas Economides

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

Giuseppe Lopomo

Fuqua School - Duke University; Duke University - Department of Economics

Glenn Woroch

University of California, Berkeley; Compass Lexecon; Georgetown Center for Business & Public Policy

Multiple version iconThere are 2 versions of this paper

Date Written: 1996

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.

Suggested Citation

Economides, Nicholas and Lopomo, Giuseppe and Woroch, Glenn, Regulatory Pricing Rules to Neutralize Network Dominance (1996). NYU Working Paper No. 2451/14182. Available at SSRN: https://ssrn.com/abstract=1548807

Nicholas Economides (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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Giuseppe Lopomo

Fuqua School - Duke University ( email )

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Glenn Woroch

University of California, Berkeley ( email )

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