Network Competition: II. Price discrimination

Transcription

1 Network Competition: II. Price discrimination J ean-jacques Laffont Patrick Rey J ean Tirole M a a r t e n W i s m a n s ( ) M i c h i e l U b i n k ( )

2 Agenda Introduction The model Main insights Propositions Conclusions

3 Companion article Framework of interconnection agreements between rival operators Studied competition between interconnected networks Assumption of non-discriminatory pricing

4 Our article Relaxes the assumption of non-discriminatory pricing Shows that the nature of competition is affected by price discrimination (in the entry and mature phase of the industry)

5 Free competition Unconstrained interconnection agreements Entrants may be handicaped (entry phase) Enforce collusive behavior (mature phase)

6 Our article Fixed cost and marginal cost Marginal cost technically determined for on-net call Depends on interconnection price of rival network for off-net call

7 Assumptions Percentage of calls terminating on net is equal to the fraction of consumers subscribing to the network The interconnection price charged by the two companies is equal Two differentiated networks in the market have full coverage and can serve all consumers

8 The model Total marginal cost C= 2C0 + C1 C0 = MC originating and terminating C1 = MC in between D emand stucture is differentiated à la H otelling

9 The model Pi = On-net prices ^Pi = Of-net prices i = Market share a = Unit access charge

10 The model Fixed cost and marginal cost Marginal cost technically determined for on-net call Depends on interconnection price of rival network for off-net call

11 The model Consumer Welfare is given by: v(p) = Consumer variable net surplus

12 Consumer expectations and market shares Price discrimination creates positive, tariff-mediated, network externalities. Customers of network i are better off the more (fewer) consumers join it if pi < p^i (pi > p^i) This article only focusses on a stable equilibrium situation

13 Main insights (1) Network interconnection eliminates network externalities under nondiscriminatory pricing Positive (negative) network externalities exist if the access price embodies a markup (discount) relative to marginal cost

14 Main insights (2) Ratio of off- and on-net call prices reflects the relative markup on access Price discrimination introduces a wastefull distortion in the consumers marginal rate of substitution between on- and off-net calls

15 Main insights ( 3 ) Trigger intense competition for market share. The bigger the market share, the less off-net cost have to be paid When the networks are poor substitutes, price discrimination decreases the double markup for on-net calls and raises it for off-net calls; This price dispersion benefits those whose net surplus function is convex A full coverage incumbent can squeeze out smaller competitors by raising interconnection prices (anticompetitive concerns)

16 Stable symmetric equilibrium When = 0 a = Unit access charge (the charge asked by a rival firm for an off-net call) c 0 = Marginal costs of terminating end of call m = Markup on access (relative to total cost of call)

17 Stable symmetric equilibrium The proportionality rule ( Lemma 1) says: Because 1 + m = 0, there is an unique equilibrium under discriminatory pricing that is symmetric and moreover stable. (The price of on and off-net calls is equal)

18 Optimimal access charge A w = Unit access charge that is socially preferred a π = Unit access charge that maximizes profit σ: = Index of substitutability. When: σ = 0: a w < a π = c 0 Then: and profit is maximized When: σ > 0: a w < c 0 < a π Then: An small increase in the substitutability parameter σ first increases both a w and a π and cares fore monopoly prices. If σ gets larger people are more interested in substituting providers and logically a π and p decrease again.

19 Impact of price discrimination Price discrimination may increase social welfare when applied to competition between equals: (i) Price discrimination may alleviate double marginalization (ii) Price discrimination intensifies competition

20 1. D ouble marginalization If the two networks are poor substitutes and if there is a markup on access (a > c0 ), social welfare is higher under price discrimination than under uniform pricing. The function W(p) reaches a max at p=c. Since all prices exceed the monopoly price because of the markup, a mean-preserving price spread stricly raises social welfare.

21 2. Intensified Competition Price discrimination lowers the average price for small markups. Pd = On-net price under discrimination ^Pd = Off-net price under discrimination Pu = Price under uniform pricing

22 Nonlinear pricing Firms know their consumers variable surplus function Firms set two-part tariffs Network i therefore charges: Fi = Fixed fee (subscriber line charge) Ti = Total revenue Qi = Consumption of on-net calls ^Qi = Consumption of of-net calls

23 Nonlinear pricing In a competition with nonlinear tariffs, if the access charge is small (a close to C0) or the networks are poor substitues, then: (i) There exists a unique equilibrium (dynamic and stable) (ii) The marginal prices are the perceived marginal costs Pi = c and ^Pi = (1+m)c

24 1. Unique equilibrium Market shares are: This defines a stable shared market equilibrium (from the point of view of consumer behavior) if which holds if either is small enough.

25 2. Marginal prices By fixing the market shares, a network i maximizes over its marginal prices Pi and ^Pi. Marginal-cost pricing is obtained, thus: Pi = C ^Pi = (1 + m)c

26 Blockaded entry A sufficient condition for the full-coverage incumbent to enjoy the full monopoly profit is that the entrant's coverage not exceed: μ 0 = Minimum coverage that makes network 1 to enjoy full monopoly profit v(p m ) = Consumer s variable net surplus with monopoly price v(p R ) = Consumer s variable net surplus with Ramsey price

27 Conclusions Two key points of departure from the nondiscriminatory pricing analysis: Raising costs through high access prices, leads to more intense competition for market share. Not necessarily to higher prices and profitability Price discrimination by a dominant operator should be opposed by potential entrants and customers. Entrants should be protected.