In this paper, we study how access pricing affects network competition when subscription demand is elastic and each network uses non-linear prices and can apply termination-based price discrimination. In the case of a fixed per minute termination charge, we find that a reduction of the termination charge below cost has two opposing effects: it softens competition but helps to internalize network externalities. The former reduces mobile penetration while the latter boosts it. We find that firms always prefer termination charge below cost for either motive while the regulator prefers termination below cost only when this boosts penetration. Next, we consider the retail benchmarking approach (Jeon and Hurkens, 2008) that determines termination charges as a function of retail prices and show that this approach allows the regulator to increase penetration without distorting call volumes.

This research was partially funded by the Kauffman Foundation and the Net Institute (www.netinst.org) whose financial support is gratefully acknowledged. We also thank the support from the Barcelona GSE research network and of the Generalitat de Catalunya. Jeon gratefully acknowledges the financial support from the Spanish government under SEJ2006-09993/ECON. Hurkens gratefully acknowledges the financial support from the Spanish Ministry of Education and Science under SEJ2006-01717.

37 pages, 3 figures.-- JEL Classification Codes: D4, K23, L51, L96. -- The paper was previously circulated under the title "A Retail Benchmarking Approach to Efficient Two-Way Access Pricing: Termination-Based Price Discrimination with Elastic Subscription Demand".

Peer reviewed