DP5031 Information Exchange and Competition in Communications Networks

Author(s): Carlo Cambini, Tommaso Valletti
Publication Date: May 2005
Keyword(s): access charges, bill-and-keep, information exchange, interconnection, reception charges
JEL(s): L41, L96
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5031

We develop a model of information exchange between calling parties. We characterize the equilibrium when two interconnected networks compete for such users by charging both for outgoing and incoming calls. We show that networks have reduced incentives to use off-net price discrimination to induce a connectivity breakdown when calls originated and received are complements in the information exchange. This breakdown disappears if operators are allowed to negotiate reciprocal access charges. We also show that a ‘bill-and-keep’ system over access charges can approximate an efficient regime and we discuss when this system emerges from private negotiations.