Competition between vertically integrated networks

Abstract

Using the Laffont et al. (Rand Journal of Economics 1998;29(1):1) framework, a model of competition between vertically integrated telecommunications networks in a deregulated environment is developed. Two local operators compete in linear and non linear tariffs (i.e. two-part tariffs) in the subscribers market. In addition, they are integrated downstream in a potentially competitive sector (i.e. long distance sector) where they face competition of other firms which require (one-way) access to local networks. The purpose of the paper is to introduce a ‘downstream’ competition in the usual framework of network competition and to focus on how the one-way access charges are set in an oligopolistic market. In a mature phase of the industry, the presence of competition in both local and long distance sectors leads to lower local and long distance tariffs. The strategic role of the two-way and one-way access charges is pointed out, with particular reference to the effect that the reciprocal (two-way) access charge has on competition in the complementary sector. Finally, in case of competition in two-part tariffs, the paper investigates: (i) the asymmetric case in which only one network is integrated; (ii) the entry process when the two local networks have different coverage. The results show how the level of the two-way and one-way access charges affects the ‘level playing field’ between networks.