NETWORK COMPETITION - II - PRICE-DISCRIMINATION

Our companion article developed a clear conceptual framework of negoti ated or regulated interconnection agreements between rival operators a nd studied competition between interconnected networks, under the assu mption of nondiscriminatory pricing. This article relaxes this assumpt ion and allows networks to charge different prices for calls terminati ng on the subscriber's network and those terminating on a rival's netw ork. This creates a price differential between services that are ident ical for the consumer and generates network externalities despite netw ork interconnection. We show that in both the mature and the entry pha ses of the industry, the nature of competition is substantially affect ed by such price discrimination.