A Retail Benchmarking Approach to Efficient Two-Way Access Pricing:
No Termination-Based Price Discrimination

Doh-Shin Jeon and Sjaak Hurkens

Abstract: We study a retail benchmarking approach to determine access prices for interconnected networks. Instead of considering fixed access charges as in the existing literature, we study access pricing rules that determine the access price that network i pays to network j as a linear function of the marginal costs and the retail prices set by both networks. In the case of competition in linear prices, we show that there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of the underlying demand conditions. In the case of competition in two-part tariffs, we consider a class of access pricing rules, similar to the optimal one under linear prices but based on average retail prices. We show that firms choose the variable price equal to the marginal cost under this class of rules. Therefore, the regulator can choose one among these rules to pursue additional objectives such as increasing consumer surplus, extending network coverage or promoting investment: for instance, we show that both static and dynamic efficiency can be achieved at the same time.

Keywords: Networks, Access Pricing, Interconnection, Competition Policy, Telecommunications, Investment.

Classification Number: D4, K21, L41, L51, L96.

RAND Journal of Economics. 39 No.3: 822-849 (2008)