A Tractable Cross-Nested Logit Model For Evaluating Two-Way Interconnection Competition With Multiple Network Subscription Open Access
Downloadable ContentDownload PDF
This research introduces a new theoretical framework for the analysis of accessn pricing (the prices that networks charge each other for the completion of calls) and the modeling of network interconnection competition. Prior work on 'two-way' access by Armstrong (1998), Laffont, Rey and Tirole (1998), and Carter and Wright (1999), et al has been built on a two-network Hotelling (1929) differentiated competition model applied to network interconnection. The current research develops an alternative approach that is based on a cross-nested logit (CNL) discrete/continuous consumer choice model with a constant elasticity of substitution (CES) calling utility specification. A principal contribution of the new modeling framework is that in addition to being able to analyze interconnection competition among multiple networks, it is designed to incorporate the element of multiple network subscription where consumers may simultaneously subscribed to more than one type of access network. By introducing multiple-network subscription and usage substitution for users subscribed to multiple networks, the analysis allows more general assessments to be made of the impact of access pricing schemes on the degree of competition between interconnected networks. The model is also not restricted to assumptions of homogeneity in calling on the differentiated networks but can incorporate call differentiation according to network type. The model is applied to evaluate the effects of dual network subscription and asymmetric network competition and to assess multi-network competition in an environment served by two mobile networks and a fixed, wireline network. While confirming the results of prior single network subscription analysis, a central finding of the research based on the developed model is that while network competition is intensified when dual network subscription occurs, negotiated access charges between connected networks continue to serve as an instrument of collusion even in cases of non-linear (two-part) consumer tariffs.