dπj,j
∂ki
ci(ki)
—2"- sisj
si
2 -j s-jb-j
(a - bi(ci + tj))
+(tj - cj) 1 -
2 -js-jb-j
))
>0
(8)
I show in appendix A.3 that also the effect on competitors’ retail profits is positive.
In a nutshell, we have identified a positive own wholesale profit effect as the cost-
reduction raises the price-cost margin and - by reducing competitors’ off-net prices
- increases the demand for incoming calls. Furthermore, we have identified a positive
externality on competitors’ wholesale profit: First, with lower off-net retail prices calling
minutes from the investor’s network increase and, second, competitors’ termination rates
increase with lower origination costs.
3.3 Comparison to Two-Part Tariffs
Similar investment effects as found with the linear pricing model are not necessarily
found with alternative pricing schemes. One commonly used approach in the literature
are two part-tariffs with per-unit prices equal to termination rates plus origination costs
(e.g. A-LRT, Wright (2002), Armstrong (2002)). Furthermore, assuming cost-based
regulation forces termination rates to be set at per-unit costs of call termination. Val-
letti and Cambini (2005) also allow for termination rates at a fixed level above marginal
costs. With these alternative/additional assumptions about a fixed termination rate
investment effects change as follows:
If the retail price for outgoing calls to network i is fixed at termination rate plus origina-
tion costs, pj,i = ti+cj , changes in termination rates are directly passed on to customers’
demand choice. Thus, the investor’s termination rate reduction increases the demand
for outgoing calls to network i.
Is the change in termination rates completely passed on to the demand for outgoing
calls? If this is the case it induces the following change in demand for calls to network
i and for calls from network i (with unrestricted termination rates):
∂ ∑j qj,i
∂ki
∂ Pj qi,j
∂ki
= c0i(ki) Pjft ⅛ = - k Si Pj Sj bj
= -j(ki)sibi P. sj (1 - 2P bb-j )
(9)