Nonlinear pricing of telecommunications with call and network externalities

This paper investigates how call and network externalities affect a monopolist's optimal nonlinear tariff in a two-way telecommunication service market, where consumers' valuations for outgoing and incoming calls are positively correlated and the firm is not allowed to charge incoming calls. It is shown that, in contrast to the traditional efficiency-on-the-top result, all subscribers including those with the highest willingness-to-pay make suboptimal quantities of calls in the equilibrium. The presence of call externalities may result in the existence of no-call-making subscribers in equilibrium. Also, the firm may have incentives to sell the service below costs to some low-valuation consumers in order to take advantage of the effect of network externalities. (C) 2003 Elsevier B.V. All rights reserved.