When you make a long-distance phone call, it has to go through the local exchange carrier's local loop, switches, transmission facilities at both originating and terminating ends and through a trunk line in between the two points. Since the breakup of AT&T in 1984, competition in long-distance market has become a normal pattern in telecommunication industry. However, incumbent in the local markets with the essential facilities like local loop, or more precisely the very last mile form the local exchange to the end-user's home, has a major market power in the market. Entrants in the long distance market have to pay access fee to get access to the local network to originate and terminate a call.
Under vertical separation, bottleneck suppliers don't compete with the entrants in the long-distance market. The competition degree of the downstream market plays a important role in determine the market efficiency. Under vertical integration, incumbents share the long distance market with new entrants by providing them access to local network. They have to consider the tradeoff between retail sales to end-users and access fee gain from entrants when they set the access fee. Normally, there are four pricing rules of access fee, ECPR, Ramsey Pricing, Cost-based pricing and Global price caps.
I. ECPR(Efficient Component Pricing Rule)
Access price is set equal to marginal cost of access plus the opportunity cost of access. The opportunity cost of access is the forgone profit contribution by selling access to downstream rather than selling to retail end-users. Here we assume the customer only subscribe one carrier.
Pa=MCa+Copp= P1-C1.
Here P1 is long-distance price of incumbent, C1 is the long-distance marginal cost of the incumbent.
ECPR is relatively simple and it ensures that only entrance who can undercut the incumbent will enter. Also, "entry is neutral regarding operating profit for the incumbent", so it won't have incentive to destroy the entrants by predatory pricing, which is a potential problem of global price cap. However, just because the ECPR rule is simple, it is not suitable when products or services are differentiated.
II. Ramsey Pricing
When maximize social welfare under the participation constrain, we can always get Ramsey pricing outcome. The mark up of local call prices, incumbent long-distance calls and entrants' long-distance calls are all obey the inverse elasticity rule. Here we use superelasticities to include the substitution and complementarity among different calls. The optimal access price under Ramsey pricing is composed of two parts, which are the standard Ramsey pricing equation and the substitution effect of the incumbents' sales of local network and their loss of retail sales.
a = 2C0 + λ/(1+ λ)(p2/ε2) + δ(p1 – 2C0 – C1) (Armstrong, Doyle and Vickers, 1996)
Also, 2C0 + δ(p1 – 2C0 – C1) is called sophisticated ECPR. δ here is a displacement ratio, which expressed the reactions of competitors. It is the ratio of quantity reaction of incumbent to the price change of entrant's long-distance call price and quantity reaction of entrances. Sometime, we call it business-stealing effect. When δ =1, Pa= P1-C1, the simple ECPR.
The universal drawback of Ramsey pricing is that the requirement of information is high, and the computational burden is heavy.
III. Cost Based Pricing- Long-run Incremental Cost Pricing( LRIC Pricing)
IV. Global Pricing Cap
Global pricing cap is a price cap includes the access pricing into the multi-product price cap. It treats access product as one of the whole products into regulation. Under this method, if regulator can assign an idealized or perfect weight to the price cap which can lead to all product pricing at Ramsey pricing. Then the global pricing cap give a more flexible way for firms to reach the optimal pricing. However, just as we said, to calculate the optimal quantity weight is an ideal idea, which requires full information. Therefore, as a good theoretical method, global pricing cap never implemented. Moreover, applying a price cap may in a way enhance the incentive of incumbent to introduce the predatory pricing strategy. The local exchange carriers might set a price below the marginal cost to get rid of competition in the first stage, and recoup the revenue from monopoly pricing later.
All of the above four access pricing method is designed for ONE WAY ACCESS situation, we will discuss later about two-way access and other topics in network industry regulation.
No comments:
Post a Comment