Termination fees revisited

We reconsider the question of the optimal level of termination fees between communication networks in the context of heterogeneous usage and elastic participation. The interaction between these two features yields new insights; in our model: i) The profit maximizing reciprocal termination fee is abo...

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Bibliographic Details
Published in:International journal of industrial organization 2013-11, Vol.31 (6), p.738-750
Main Authors: Jullien, Bruno, Rey, Patrick, Sand-Zantman, Wilfried
Format: Article
Language:English
Subjects:
Communication
Communications networks
Costs
Economic theory
Elasticity
Fees & charges
Mobile
Network
Networks
Profit maximization
Studies
Termination fee
Terminations
Welfare
Welfare economics
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Summary:We reconsider the question of the optimal level of termination fees between communication networks in the context of heterogeneous usage and elastic participation. The interaction between these two features yields new insights; in our model: i) The profit maximizing reciprocal termination fee is above marginal cost; ii) the welfare maximizing termination fee is also above cost; iii) the welfare-maximizing termination fee is below the profit-maximizing one in the absence of termination-based price discrimination, but can be above it otherwise. •The paper analyzes network reciprocal termination fees with heterogenous consumers.•The profit-maximizing (PM) level is above the marginal cost of termination.•The welfare-maximizing (WM) level is also above cost.•Without termination-based price discrimination, the WM level is below the PM level.•The conclusions are robust in considering endogenous utility for receiving calls.
ISSN:0167-7187
1873-7986
DOI:10.1016/j.ijindorg.2013.05.006