Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing

29 Pages Posted: 5 Feb 1997 Last revised: 23 Aug 2014

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: July 2007

Abstract

We discuss the effects of strategic commitments and of network size in the process of setting interconnection fees across competing networks. We also discuss the importance of the principles of reciprocity and imputation of interconnection charges on market equilibria. Reciprocity means that both networks charge the same for interconnection. Imputation means that a network charges its customers as much as it charges customers of the other network for the same service. Assuming that each consumer cannot subscribe to more than one network, we begin by analyzing a game of strategic symmetry where the two networks choose all prices simultaneously. Second, we allow a dominant network to set the interconnection fee before the opponent network can set its prices. This results in a price-squeeze on the rival network. Third, we show that the imposition of a reciprocity rule eliminates the strategic power of the first mover. Under reciprocity, one network sets the common interconnection fee at cost, and the equilibrium prices for final services are lower than in the two previous games without reciprocity. Moreover, prices under reciprocity obey the principle of imputation. In the long run, consumers subscribe to one of the two networks. Typically, there is a multiplicity of equilibria, including corner equilibria, where all consumers subscribe to the same network. However, under reciprocity, there are no corner equilibria.

Keywords: Two-way networks, interconnection, reciprocity, parity, two-sided bottlenecks

JEL Classification: L1, D4

Suggested Citation

Economides, Nicholas and Lopomo, Giuseppe and Woroch, Glenn, Strategic Commitments and the Principle of Reciprocity in Interconnection Pricing (July 2007). NYU Working Paper No. EC-05-10. Available at SSRN: https://ssrn.com/abstract=1736 or http://dx.doi.org/10.2139/ssrn.1736

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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