The name is absent

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(s_i)p_i,j = a-b_ip_i,j calling minutes to customers
in network j, j = 1, ..., N, i 6= j, where p_i,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_-i^b-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) =      π_iⁱ_,j +     π_jⁱ_,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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