Angel Luis Lopez

Foreclosing competition through access charges and price discrimination

This article analyzes competition between two asymmetric networks, an incumbent and a new entrant. Networks compete in non-linear tariffs and may charge different prices for on-net and off-net calls. Departing from cost-based access pricing allows the incumbent to foreclose the market in a profitable way. If the incumbent benefits from customer inertia, then it has an incentive to insist in the highest possible access markup even if access charges are reciprocal and even in the absence of actual switching costs. If instead the entrant benefits from customer activism, then foreclosure is profitable only when switching costs are large enough.

Mobile Termination, Network Externalities and Consumer Expectations

We re-examine the literature on mobile termination in the presence of network externalities. Externalities arise when firms discriminate between on- and off-net calls or when subscription demand is elastic. This literature predicts that profit decreases and consumer surplus increases in termination charge in a neighborhood of termination cost. This creates a puzzle since in reality we see regulators worldwide pushing termination rates down while being opposed by network operators. We show that this puzzle is resolved when consumers expectations are assumed passive but required to be fulfilled in equilibrium (as defined by Katz and Shapiro, AER 1985), instead of being rationally responsive to non-equilibrium prices, as assumed until now.

Mobile termination, network externalities, and consumer expectations

We re-examine the literature on mobile termination in the presence of network externalities. Externalities arise when firms discriminate between on- and off-net calls or when subscription demand is elastic. This literature predicts that profit decreases and consumer surplus increases in termination charge in a neighborhood of termination cost. This creates a puzzle since in reality we see regulators worldwide pushing termination rates down while being opposed by network operators. We show that this puzzle is resolved when consumers? expectations are assumed passive but required to be fulfilled in equilibrium (as defined by Katz and Shapiro, AER 1985), instead of being rationally responsive to non-equilibrium prices, as assumed until now.

Mobile termination rates and the receiver-pays regime

The European Commission has recently invited national regulatory authorities to decrease access charges to the cost of an efficient operator. Some large operators warned regulators and users that cutting access charges could result in the US style business model, where mobile users pay for both making and receiving calls. I show that mobile operators charge for incoming calls when the access charge is below cost even if receivers can hang up. In such a case profits are neutral with respect to the level of the access charge. I further show that [`]bill and keep is a constrained social optimum when the call externality is strong, even if receivers pay and can hang up. Finally, I discuss the policy implications of these results.

Foreclosing Competition Through High Access Charges and Price Discrimination

This article analyzes competition between two asymmetric networks, an incumbent and a new entrant. Networks compete in non‐linear tariffs and may charge different prices for on‐net and off‐net calls. When access charges are high, this allows the incumbent to foreclose the market in a profitable way if switching costs are sufficiently large. In the absence of termination‐based price discrimination, however, such foreclosure strategies are not profitable.

Who Should Pay for Two-Way Interconnection?

European and the US mobile communication services markets have developed in rather different ways. There are striking differences in termination regulation and retail pricing models and one may wonder why this occurred and whether either of the markets outperforms the other in terms of efficiency and/or profitability. We address these issues by analyzing a symmetric oligopoly model in which firms are able, but not obliged, to charge subscribers for receiving and placing calls, may discriminate between on- and off-net calls and may request a monthly subscription fee. We show that a continuum of equilibria exist for any reciprocal termination rate, some of which resemble the European business model (with zero charges for reception) while others resemble the US business model (with equal prices for placing and receiving calls). We show that under neither of these business models full efficiency can be achieved. Comparing the European business model with termination regulated at cost to the US business model with voluntary Bill and Keep arrangements we show that the European scenario is more efficient when call externality is modest, and more profitable when either call externality is modest and call demand elasticity high or call externality high and call demand elasticity low. Our predictions are consistent both with observed network operators opposition to lowering termination rates in Europe and with voluntary agreements to Bill and Keep arrangements in the US.

Mobile Termination and Consumer Expectations Under the Receiver-Pays Regime

We analyze how termination charges affect retail prices when taking into account that receivers derive some utility from a call and when firms may charge consumers for receiving calls. A novel feature of our paper is that we consider passive self-fulfilling expectations and do not allow for negative reception charges. We reconfirm the finding of profit neutrality when firms cannot use termination-based price discrimination and show that connectivity is prone to breakdown.

Comparing divestments and VPPs in electricity generation markets

We study the impact of electricity divestments of intermediate size in a stylised model where a dominant producer faces a competitive fringe with the same cost structure and is forced to sell some of its capacity. We find that the divestment which achieves the greatest reduction in prices can be several times more effective in reducing prices than a divestment of baseload (or low-cost) plants. We also compare divestments of intermediate size and Virtual Power Plants (VPPs), establishing that VPPs are significantly less effective than the optimal divestment.

Selecting effective divestments in electricity generation markets

We study the impact of electricity divestments in a stylised model where a dominant producer faces a competitive fringe with the same cost structure and is forced to sell some of its capacity. For a given demand level, the divestment which achieves the greatest reduction in prices can be several times more effective in reducing prices than a divestment of base load (or low-cost) plants. We extend this theoretical result to the case with variable electricity demand by considering a numerical example based on data from the Italian market.

Dynamic Competition in Telecom Networks Under the Receiver Party Pays Principle

This paper analyzes how the implementation of the Receiver Party Pays regime affects networks operators pricing strategies in a model of dynamic competition. We characterize the equilibrium and provide sufficient conditions under which it exists and is unique. We show that in equilibrium networks price calls at their off-net cost, and that the off-net cost pricing equilibrium neutralizes the potential role that future reciprocal access charges could play as an instrument to undermine retail competition. Last, we argue that while the level of the termination charge does not affect networks profits, it clearly distorts consumer welfare.