on-net and off-net pricing on asymmetric telecommunications networks
TRANSCRIPT
On-net and off-net pricing on asymmetric telecommunications networks
On/Off-net Pricing on Asymmetric Telecommunications Networks
Steffen HoernigFEUNL, Lisbon; CEPR, London
ICP-Anacom, 08/05/2007
Overview
1. Interconnection2. Uniform tariffs versus destination-based
price discrimination3. Above-cost termination charges4. Call externalities5. Predation attempts
1. Interconnection2. Uniform tariffs versus destination-based
price discrimination3. Above-cost termination charges4. Call externalities5. Predation attempts
Interconnected Networks
• Telecommunications networks were not always interconnected– Result was AT&T monopoly (until 1980’s)
• Open Network Provision doctrine– All public telecommunications networks must
give interconnection• Maximize network externalities• Avoid monopolization due to network externalities
Types of Access (1)
• One-way interconnection– Normally between incumbent and entrants
• National roaming• Indirect access, resale, MVNOs
– Main competition problems:• Foreclosure through high access price or refusal• Foreclosure through non-price discrimination or
“sabotage”– Standard solution: regulation of access price
and procedures / quality
Types of Access (2)
• Two-way interconnection– Non-rival:
• International calls• International Roaming• Fixed-mobile traffic (though increasingly rival)
– Rival:• (National) Termination of M2M traffic• Traffic between fixed networks
Types of Access (3)
• Non-rival two-way interconnection– Main competition problem:
• Double marginalization due to– Independent retail and wholesale margins– Roaming customers’ ignorance about host network
– Solution: (Retail or) Wholesale price controls(in particular “relevant markets” 16,17)
• Or voluntary limits through bilateral or multilateral agreements between operators
Types of Access (4)
• Rival two-way interconnection– Main competition problems:
• Non-cooperative choice of termination charges:– Double marginalization– Foreclosure of entrants
• Cooperative choice of (especially reciprocal) termination charges:
– Collusion
• Leverage of network effects through tariff-mediated network effects? -> this paper
Literature
• Overview articles– Armstrong (2002), Vogelsang (2003)
• Books: Laffont and Tirole (2000), HBTEv1• Two-way interconnection:
– “classics” on termination: LRT98a,b, Armstrong98
– call externalities: Kim&Lim01, Jeon et al. 04, Berger04, Cambini&Valletti05
– on/off-net discrimination: LRT98b, Hoernig05
1. Interconnection2. Uniform tariffs versus destination-based
price discrimination3. Above-cost termination charges4. Call externalities5. Predation attempts
Principal Types of Tariffs
• Linear versus two-part tariffs– linear: constant price per minute– TPT: fixed fee plus constant price per minute– co-exist in menus– common variant: minimum consumption
• Uniform tariffs versus destination-based price discrimination– Uniform: same price to all networks– PD: on-net price different from off-net price
Uniform tariffs
• Quite rare in Portugal• Since 2005: UZO, rede4, Vodafone Direct
– uniform tariffs with 12 or 16 c/min• Main advantage: simplicity
– valued more by consumers who make few calls
Destination-based price discrimination
• Most common model• On-net price lower than uniform price, and
off-net price higher than uniform price• Questions:
– simply one more pricing instrument?– “undue advantage” for larger networks?– instrument of predation?– > good or bad for competition?
Drivers of On/Off-Net Differentials
• Termination charges– higher cost of off-net calls– Attention: need to distinguish clearly between
F2M and M2M interconnection• Strategic motives
– Create “tariff-mediated network externalities”– Exploit call externalities– Predation (?)
1. Interconnection2. Uniform tariffs versus destination-based
price discrimination3. Above-cost termination charges4. Call externalities5. Predation attempts
Termination: Fixed-Mobile
• Above-cost termination on mobile network is a subsidy paid by users of fixed network– Was considered justified when mobile
penetration was still low: competition should increase number of users
– Source of revenue for mobile operators• Higher fixed-mobile termination charges during
entry phase help new mobile entrants
Termination: Mobile-Mobile
• Reciprocal termination charges– Can be instrument of collusion (focus of
economic literature on the subject)• Individual (non-cooperative) setting of
termination charges– (Double marginalization problem)– Instrument of foreclosure of rivals– Lead to adverse tariff-mediated network effects
since rivals’ off-net prices increase accordingly• especially for small networks
Termination charge at cost
• Result from academic literature:– “On-net price = off-net price if termination price
equal to cost”– Implies that on/off-net differentials are simply
cost-driven• Only true if there are no call externalities
– Only takes callers’ utility and decisions into account, but
– People care about being called
1. Interconnection2. Uniform tariffs versus destination-based
price discrimination3. Above-cost termination charges4. Call externalities5. Predation attempts
Call Externalities
• Utility of receiving calls!– Has long been neglected in the literature– Now at a focus of investigation
• Additional effects:– Possibility of “hurting” rivals’ consumers
through higher off-net prices => fewer calls• Therefore choice of higher off-net prices!
– Significant on/off-net differentials even with termination prices at cost
Equilibrium Prices
• Model in paper:– in LRT tradition, adds call externality– focus on retail prices– assumes one large and one small network
• In Nash equilibrium, both for linear and two-part tariffs,– both networks charge more for off-net calls– larger network charges more and has higher
on/off-net differential
Effect of Call Externality
• Stronger call externality leads to– insignificant changes in market share– lower on-net prices– (mostly) higher off-net prices– lower profits
• Competition for clients intensifies• Conclusion: on/off-net differential is
instrument of “normal” network competition
Simulation: call externality
pii: on-net.pij: off-net.Gamma=0: no call externality. Termination at cost, thus pii=pij at left border.
1. Interconnection2. Uniform tariffs versus destination-based
price discrimination3. Above-cost termination charges4. Call externalities5. Predation attempts
Predation Hypothesis
• Hypothesis: firm A tries to limit firm B’s profits– Short-term loss but long-term gain for firm A
• Question: What would on/off-net prices be in a predation strategy?– Clearly, lower on-net price– Lower off-net price to attract consumers? Or higher off-
net price to harm other network’s clients?– We can expect much larger on/off-net differential– Quantitative, not qualitative, question!
Predation Equilibrium
• If the large network “predates” in the above sense, then– Large network has high on/off-net differential– If termination price is above (below) cost then
large network increases (decreases) off-net price in order to limit small network’s termination revenue
– Small network responds by lowering prices while maintaining differential
– Large network profits suffer strongly
Simulation: predation
Nash equilibrium at the right border.Predation lowers profits of firm 2.
Conclusions
• On/off-net differentials appear as a result of competition between networks, in the presence of – above-cost termination charges– strategic effects due to call externalities
• Even with a balanced calling pattern, small networks will tend to face permanent access deficits
• On/off-net differentials will be larger than in Nash equilibrium if there is anti-competitive intent– but making the distinction empirically is hard
Questions!