Network Competition with Reciprocal Proportional Access Charge Rules

This paper presents a model of two competing local telecommunications networks, similar in spirit to the model of Laffont, Rey and Tirole (1996). The networks have different attributes which we assume are fixed and the consumers have idiosyncratic tastes for these attributes. The networks are mandated to interconnect and the access charges are determined cooperatively in the first stage. In the second stage, the two network companies are engaged in a price competition to attract consumers. In the third stage, each consumer selects a network and determines the consumption of phone calls. Laffont, Rey and Tirole (1996) have shown that except for restrictive scenarios, the local price competition does not result in a pure strategy equilibrium. In this paper, we assume that the two companies choose access charge rules rather than simply access charges. These rules determine the access charges as a function of the future local prices. We show that the family of reciprocal proportional access charge rules generates a pure strategy equilibrium and we discuss its properties. (JEL D4, K21, L41,43, L51, L96)