Reconciling the Off-Net Cost Pricing Principle with Efficient Network Utilization

FTC Bureau of Economics Working Paper No. 265

33 Pages Posted: 16 Apr 2004

See all articles by Patrick DeGraba

Patrick DeGraba

Federal Trade Commission - Antitrust I

Date Written: August 2003

Abstract

The off-net-cost pricing principle argues that under a broad range of environments a positive "access" charge paid by originating networks to interconnected terminating networks would cause networks to set on-net usage charges equal to off-net rates, and that these charges would fully reflect the access charge. However, other results in the literature provide reasonable conditions under which on-net usage charges will not reflect access charges, but would be set to induce the social surplus maximizing level of on-net usage. This paper harmonizes these two apparently opposing results by showing that retail usage charges depend on two effects. One is a rent seeking effect on the part of networks and the other is an efficient utilization effect. In models in which the rent seeking effect is more important, on-net usage charges will tend to equal their off-net usage charges and incorporate the access charge. In models in which the efficient utilization effect matters more, off-net usage charges will reflect access charges, while on-net usage charges will not be affected by the level of access charges, but instead will tend to be set at the levels that promote efficient on-net utilization.

Keywords: Access charges, interconnection

JEL Classification: L13, L51

Suggested Citation

DeGraba, Patrick, Reconciling the Off-Net Cost Pricing Principle with Efficient Network Utilization (August 2003). FTC Bureau of Economics Working Paper No. 265. Available at SSRN: https://ssrn.com/abstract=530824 or http://dx.doi.org/10.2139/ssrn.530824

Patrick DeGraba (Contact Author)

Federal Trade Commission - Antitrust I ( email )

600 Pennsylvania Avenue, NW
Rm. 4249
Washington, DC 20580
United States
202-326-2855 (Phone)
202-326-3443 (Fax)

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