Network competition with heterogeneous customers and calling patterns

Abstract

The telecommunications industry is a fragmented market, characterized by a tremendous amount of customer heterogeneity. This paper shows how such customer heterogeneity dramatically affects nonlinear pricing strategies: (i) First, if there are unbalanced calling patterns between different customer types, networks make larger profits on the least attractive customers. In addition, the nature of the calling pattern substantially affects how networks discriminate implicitly between different customer types. (ii) Second, different customer types often perceive the substitutability of competing networks differently. The profit neutrality of the access charge, highlighted in the literature, is then shown to break down.