The International Handbook of Telecommunications Economics, Volume I
Edited by Gary Madden
Chapter 6: Retail telecommunications pricing in the presence of external effects
6. Retail telecommunications pricing in the presence of external eﬀects Benjamin E. Hermalin and Michael L. Katz INTRODUCTION This chapter examines the retail pricing of telecommunications network services. By telecommunications, we mean any electronic or photonic transport of data from one party to another. These networks may be circuit switched or packet based, wireless or wire-line. Although our analysis applies most directly to one-to-one communications, some of our ﬁndings can be readily modiﬁed to apply to one-to-many, or broadcast, networks, such as over-the-air and cable television. Many of the pricing results stated here also are relevant to electronic payment networks. Our central concerns are how to price access to a network and how to price the exchange of information based on some measure of use. We measure use in terms of discrete messages, where a message could be a telephone call, a paging message, a data ﬁle, an e-mail, or a video conference call, for example. Telecommunications services possess several characteristics that raise interesting pricing issues. In this chapter, we focus on four characteristics and their implications for socially and privately optimal pricing to endusers: 1. Consumption decisions have external eﬀects. Consumption of communications services involve two (or more) parties, both of whom take actions, receive beneﬁts, and bear costs. The fact that multiple parties consume a single message gives rise to external eﬀects, also referred to as network eﬀects. Previous authors have distinguished two types of eﬀect.1 One is an access externality,...
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