Selective Price Cuts and Price Discrimination Bans in Network Industries

Abstract

In order to encourage competition in network-based industries such as telecommunications, some jurisdictions have adopted regulatory rules which prevent the incumbent service provider from selectively cutting prices in response to market entry. Given such bans on price discrimination, the incumbent cannot react to competition by selectively adjusting prices, based on the competitive situation in a given market, but has to maintain the same price across all markets. This paper analyses the welfare effects of such a rule for both one-way networks (access model) and two-way networks (interconnection model) when consumers have switching costs. We find that, even though bans on price discrimination can induce inefficient entry for a range of parameter constellations, there are also cases where they induce efficient market entry. This is the more likely to be the case the higher the fixed costs of entry.