INTERCONNECTION PRICING - AN ANALYSIS OF THE EFFICIENT COMPONENT PRICING RULE

A potential entrant wishes to offer a long-distance service by establi shing its own long-distance 'upstream' facility and using the incumben t's local ('downstream') network to provide reticulation of its calls, and the issue is to determine an efficient interconnection price for the entrant's use of that facility. William Baumol has proposed the 'e fficient component pricing rule' (ECPR) which is developed using a sim plified railroad example. The efficient component price includes both incremental costs and overheads. Analysis of efficient interconnection pricing revolves around the definition of incremental and 'overhead' costs, and it is concluded that the ECPR does not provide an efficient basis for interconnection pricing.