DP8114 Calling Circles: Network Competition with Non-Uniform Calling Patterns

Author(s): Steffen Hoernig, Roman Inderst, Tommaso Valletti
Publication Date: November 2010
Keyword(s): Network competition, Non-uniform calling patterns, Termination charges
JEL(s): L13, L51
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8114

We introduce a flexible model of telecommunications network competition with non-uniform calling patterns, which account for the fact that customers tend to make most calls to a small subset of people. Equilibrium call prices are distorted away from marginal cost, and competitive intensity is affected by the concentration of calling patterns. Contrary to previous predictions, jointly profit-maximizing access charges are set above termination cost in order to dampen competition, and the resulting on-net prices are below off-net prices, if calling patterns are sufficiently concentrated.