The Economics of Twoway Interconnection

Transcription

1 FORSCHUNGSERGEBNISSE DER WIRTSCHAFTSUNIVERSITÄT WIEN Ulrich Berger The Economics of Twoway Interconnection

2 FORSCHUNGSERGEBNISSE DER WIRTSCHAFTSUNIVERSITÄT WIEN Ulrich Berger The Economics of Two-way Interconnection This book studies the economics of telecommunications networks characterized by two-way interconnection. Special emphasis is put on the role of access charges. Starting from the standard model used in the literature on network competition, the effect of departing from three of this model s less realistic assumptions is investigated. First, call externalities are integrated into the model. Secondly, competition between three or more networks is studied in a dynamic setting. Finally, a local interaction structure between agents is introduced to replace the unrealistic assumption of balanced calling patterns. In each of these cases, some of the conventional wisdom on the role of access charges is overturned by new results. For his research on the topic of this book Ulrich Berger was awarded the Research Prize of the Vodafone Foundation and the WU Best Paper Award. Ulrich Berger holds a doctoral degree in mathematics from the University of Vienna and a doctoral degree in economics from Vienna University of Economics. He is at the faculty of the latter s Department of Economics. He also worked on game theory and industrial organization at the IIASA in Laxenburg and the University of Munich.

3 The Economics of Two-way Interconnection

4 Forschungsergebnisse der Wirtschaftsuniversitat Wien Band 13 PETER LANG Frankfurt am Main Berlin Bern Bruxelles New York Oxford Wien

5 Ulrich Berger The Economics of Two-way Interconnection ~ PETER LANG Europaischer Verlag der Wissenschaften

6 Bibliographic Information published by Die Deutsche Bibliothek Die Deutsche Bibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the internet at < Open Access: The online version of this publication is published on and under the international Creative Commons License CC-BY 4.0. Learn more on how you can use and share this work: org/licenses/by/4.0. =t This book is available Open Access thanks to the kind support of ZBW Leibniz-Informationszentrum Wirtschaft. Printed with support of Wirtschaftsuniversitat Wien. ISSN ISBN US-ISBN ISBN (ebook) Peter Lang GmbH Europaischer Verlag der Wissenschaften Frankfurt am Main 2006 All rights reserved. All parts of this publication are protected by copyright. Any utilisation outside the strict limits of the copyright law, without the permission of the publisher, is forbidden and liable to prosecution. This applies in particular to reproductions, translations, microfilming, and storage and processing in electronic retrieval systems. Printed in Germany

7 Acknowledgements A number of people have provided valuable suggestions, comments, and critique on this work. I want to thank Hanns Abele, Toker Doganoglu, Joshua Gans, Guido Schafer, Stefan Schmitz, Oz Shy, Jean Tirole, Michael Winkler, and two anonymous referees. Eva Pichler and Michael Winkler have kindly agreed to serve as my advisors for the thesis underlying this book. Several useful hints were also received from participants of the IHS Workshop on Network Economics, the 7th Spring Meeting of Young Economists, the 2002 Meeting of the Austrian Economic Association, the 2002 Annual Meeting of the Vienna University of Economics and Business Administration, the 1st International Industrial Organization Conference, the 18th Congress of the European Economic Association, the 30th European Association for Research in Industrial Economics Conference, and Research Seminars at Kindberg, Munich, and Vienna. Part of this work was carried out while I visited the University of Munich as a Marie Curie Research Fellow. I want to thank the members of the Department of Economics, especially Monika Schnitzer and Andreas Haufler, for their hospitality, and the European Commission for financial support. I am also grateful to the Vienna University of Economics and Business Administration for financing my visits to various conferences where I presented parts of this work, and for providing me with a research scholarship in Finally, very special thanks go to Linda Reimoser, who unintentionally triggered this project with a remark on the importance of the call externality when choosing a mobile phone network. Without her loving help and support, this work would hardly have come to pass.

8

9 Contents 1 Introduction 1. 1 Two-Way Interconnection 1. 2 Telecommunications The Role of the Access Charge. 1.4 Literature Overview Linear Pricing Models Nonlinear Pricing Models Termination-Based Price Discrimination 1.5 Introducing Call Externalities 1.6 Outline The Basic Model 2.1 Cost and Price Structure. 2.2 Subscription Decision and Demand 2.3 Existence and Stability of Equilibria Existence of Consumer Equilibria Stability of Consumer Equilibria Network Equilibria 3 Linear Pricing 3.1 First Order Conditions Constant Elasticity of Demand

10 3.3 Graphical Analysis Comparative Statics The Collusive Role of the Access Charge The Socially Optimal Access Charge Discussion Nonlinear Pricing Equilibrium Analysis Profit Maximizing Access Charge Welfare Maximizing Access Charge Discussion The Dynamics of Market Shares Existence, Multiplicity, and Stability of Equilibria Out-of-Equilibrium Dynamics Dynamical Systems Levels of Rationality Simplifying Assumptions Best Response Dynamics Two Networks Three Networks On-net Price below Off-net Price On-net Price above Off-net Price Cyclic Symmetry The General Case Discussion The Coexistence Puzzle Introduction Local Interaction Models 74 8

11 6.3 A Simple Hexagonal Graph Structure. 6.4 Discussion Bibliography

12