On the problem of network monopoly

Abstract

We consider the problem of pricing in a network industry focussing in particular on the issue of cross-network pricing (e.g. cross-network cell phone charges). Economic theory tells us in relation to cross-network pricing that collusion or network monopoly may yield welfare as well as profit benefits although any welfare benefits from cross-network collusion may be more than offset by a reduction in competition elsewhere. To address this, we introduce a new regulatory concept: the independent profit-maximising agent. The agent sets prices on cross-network goods taking either (i) a complete, or (ii) an arbitrarily small, share of the associated profit. We examine welfare and profits with and without agent type (i) and (ii) with collusion (network monopoly) between the non-agent firms and without collusion (independent network duopoly). We show that splitting up the network monopoly (creating independent network duopoly) may be inferior for both society and firm(s) compared with a network monopoly ‘regulated’ by an agent and that society always prefers any of the four agent regimes over network monopoly and network duopoly. Indeed, employing the agent may reduce welfare losses by a large proportion while having relatively little effect on profit.