Consider a market with a countable number of MNPs i, i = 1, ..., N, i 6= -i. Customers
are of mass 1 and have randomly chosen one MNP. As in Dewenter and Haucap (2005)
customers receive the same gross-utility a from calling but no utility from being called.3
Calls are assumed to be balanced across customers.
Each customer in network i demands a-b(si)pi,j = a-bipi,j calling minutes to customers
in network j, j = 1, ..., N, i 6= j, where pi,j is the per-minute price for outgoing calls to
network j , bi is a scale parameter for price-elasticity increasing in the investor’s market
share si, b0(si) > 0. The larger bi the lower is the willingness to pay for one unit of off-net
calling. As I will only consider off-net traffic the on-net/off-net pricing strategies and
the utility of being with a particular MNP need not be further specified. Customers only
decide on the call length dependent on prices. The short-run demand function deviates
from the model in Dewenter and Haucap (2005) where the representative off-net demand
depends on the average off-net prices weighted by competitors’ market shares.4
MNPs are active in a calling-party-network-pays regime (cpp regime). The per-minute
termination rate ti is the wholesale price which one MNP asks another for terminating a
call. The per-unit costs ci are identical for call origination and termination (as assumed
in A-LRT). Finally, I assume the long-run market to be sufficiently less concentrated.
For this setting this means si < 2 P-i s-ib-i.
3.1 Short-run price choice
With a linear pricing scheme provider i’s short-run off-net profits from call origination
and termination are given by:
πi(pi,j,ti) = πii,j + πji,i = ((pi,j -tj - ci)sisj(a- bipi,j))
j j j (1)
+ ((ti - ci)sisj(a - bjpj,i))
j
3 For the analysis of quality investments one could think of identical gross-utilities for customers per
provider ai .
4 A more detailed discussion on customers demand for off-net calls can be found in Dewenter and
Haucap (2005) and Hoernig (2007). Nevertheless, it is obvious that by adopting Dewenter and
Haucap’s assumptions, bi = bj = b and pi = ci, one receives similar results with the model of this
paper.
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