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Calling circles: network competition with nonuniform calling patterns

Authors


  • We would like to thank two anonymous referees and the editor for very constructive comments on an earlier version of the article. We are also grateful to Luís Vasconcelos and seminar participants in Chania (CRESSE), Florence (EUI), London (NERA), Paris (CREST and Telecom ParisTech), University of East Anglia, Padua, and York. Steffen Hoernig acknowledges support from a Novaforum grant and FCT project PTDC/EGE-ECO/100696/2008.

Abstract

We introduce a flexible model of telecommunications network competition with nonuniform calling patterns, accounting for the fact that customers tend to make most calls to a small set of similar 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 if calling patterns are sufficiently concentrated. We discuss implications for regulating access charges as well as on- and off-net price discrimination.

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