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Traditional Telecommunications Networks

The International Handbook of Telecommunications Economics, Volume I

Edited by Gary Madden

This major reference work provides a thorough and up-to-date survey and analysis of recent developments in the economics of telecommunications. The Handbook serves both as a source of reference and technical supplement for the field of telecommunications economics.
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Chapter 6: Retail telecommunications pricing in the presence of external effects

Benjamin E. Hermalin and Michael L. Katz


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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