On-Net and Off-Net Pricing On Asymmetric Telecommunication Networks

Prof. Steffen Hoernig presented his final version of a paper on “On-net and Off-Net Pricing On Asymetric Telecommunications Network”[1] at the 7th ICP-ANACOM Seminar, in 09/05/2007.

It is common that fixed and mobile operators with a relative small number of customers argue their competitors’ high off-net prices are anticompetitive.

Hence, the presented model, shows a large and a small telecommunications network competing in either linear or two-part tariffs, with a focus on the differential between on- and off-net prices.

This paper concludes that:

(a) when the utility of receiving calls is considered, the equilibrium pricing structures will indeed depend on firms’ market shares and larger operators will charge higher off-net prices even without anticompetitive intent. This happens, in Nash equilibrium, because the presence of the call externality gives incentives to the large network to limit off-net calls in order to make the smaller network less attractive;

(b) predatory behavior would be accompanied by even larger on-net / off-net differences, even if access charges are set at cost, because:

(b.1) a positive margin between access charge and access cost, at the smaller network, creates access revenue from incoming calls. Therefore the larger network sets an even higher off-net price to limit the outgoing calls and, consequently, the smaller network’s access revenue;

(b.2) the larger network competes more vigorously using lower on-net prices if competition is in linear tariffs, and lower fixed fees if competition is in two-part tariffs. This is usually accompanied by higher off-net prices.

The distinction, namely for regulatory purposes, of the two types of behavior, if it is to be based on market data, could in principle be done by calibrating market equilibrium models or, if that information is unavailable, international comparisons may help to identify extreme cases.

The debate, such has happened in the presentation of the fist version of this paper, which I also attended in the ITS Conference at O’Porto, in 2005, was lively, especially around the following issues:

(a) what is the most relevant factor, when opting between a predatory strategy vs a collusive or at least a non-predatory) strategy – size of the larger operator or number of operators?

(b) what is the exact definition of predatory pricing? For instance, if a company is selling bellow the efficient cost of its competitor (namely due to economies of scale, of scope or accrued efficiency), can that practice be considered predatory?

(c) how to consider an evolution of the model in order to make it closer to (Portuguese) reality regarding the mobile sector, three operators of different sizes? And what could one, in general terms, foresee in relation to the expectable results?

[1] http://www.anacom.pt/streaming/Estudo8mai07.pdf?categoryId=241362&contentId=481092&field=ATTACHED_FILE