Regulatory pricing rules to neutralize network dominance

Journal Article (Journal Article)

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.

Full Text

Duke Authors

Cited Authors

  • Economides, N; Lopomo, G; Woroch, G

Published Date

  • January 1, 1996

Published In

Volume / Issue

  • 5 / 4

Start / End Page

  • 1013 - 1028

International Standard Serial Number (ISSN)

  • 0960-6491

Digital Object Identifier (DOI)

  • 10.1093/icc/5.4.1013

Citation Source

  • Scopus