On access pricing with network externalities

It has been argued that access charges may be set optimally by applying the Efficient Component Pricing Rule (ECPR). The paper analyzes the optimality properties of the ECPR in the presence of network externalities in the telecommunications sector. It is assumed that network externalities in the fixed telephony, which is operated by an incumbent monopoly, may arise from the increase in the number of subscribers of a mobile carrier that seeks interconnection to the fixed network. It is shown that the optimality properties of the ECPR that may exist under some restrictive assumptions, do not hold in the presence of network externalities. Specifically, the ECPR may take into account the social opportunity cost with the entry of the competitor, but it fails to incorporate the social benefit accrued to consumers of the fixed telephony when network externalities are present. Presented at the Fifty-First International Atlantic Economic Conference March 13–20, 2001, Athens, Greece. The author would like to thank participants of the Conference, in particular, Michael Pickhardt and Neil Rickman and an anonymous referee for useful comments and suggestions.