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TO NEUTRALIZE NETWORK DOMINANCE1
Nicholas Economides2
Giuseppe Lopomo3
Glenn Woroch4
September 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.
JEL classification: L1, D4
Key words: two-way networks, interconnection, reciprocity, imputation, unbundling
Industrial and Corporate Change, vol. 5, no. 4, (1996), pp. 1013-1028.
1 A technical version of this paper was presented at the Consortium for Research on Telecommunications Policy at Northwestern University, May 1996. We thank Steve Wildman for his helpful comments and encouragement.
2 Stern School of Business, New York University, NY 10012-1126 and Center for Economic Policy Research, Stanford University, Stanford, CA 94305. Phone: (212) 998-0864, (415) 725-9415, Fax: (212) 995-4218, (415) 723-8611, email: neconomi@stern.nyu.edu, WWW: http://www.stern.nyu.edu/networks/
3 Stern School of Business, New York University, NY 10012-1126. Phone: (212) 998-0859, email: glopomo@stern.nyu.edu
4 Department of Economics, University of California, Berkeley, CA 94720-3880. Phone: (510) 642- 4308, Fax: (510) 642-6615, email: glenn@econ.berkeley.edu, WWW: http://elsa.berkeley.edu/~woroch
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