Network Competition in Nonlinear Pricing
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Previous research, assuming linear pricing, has argued that telecommunications networks may use a high access charge as an instrument of collusion. I show that this conclusion is difficult
to maintain when operators compete in nonlinear pricing: (i) As long as subscription demand is inelastic, profits can remain independent of the access charge, even when customers are heterogeneous and networks engage in second-degree price discrimination. (ii) When demand for subscriptions is elastic, networks may increase profits by agreeing on an access charge below marginal cost (relative to cost-based access pricing). Welfare is typically increased by setting the access charge above marginal cost.
Source: RAND Journal of Economics
Dessein, Wouter. "Network Competition in Nonlinear Pricing." RAND Journal of Economics 34, no. 4 (Winter 2003): 593-611.