Models of Interconnection in Telecommunications

Abstract

We proposed and utilized a simple model to review relay interconnection literatures. Without any complications of scale economies and opportunity costs, marginal cost pricing of interconnection charge is optimal. When incumbent sets the interconnection charge, it may or may not foreclose entrants depending upon degree of entrant's efficiency and forms of interconnection charge. When there are opportunity costs for incumbent to interconnect, then opportunity cost should be paid by the entrant according to the efficient component pricing rule. When there are economies of scale, Ramsey pricing comes to rescue. In an extension of Ramsey spirit, the global price caps are suggested. Next, we have reviewed the current status of the two-way access theory. First, a case of collusive retail prices has been presented even when the market competition exists between symmetric networks. In this case, the use of two-part tariffs or price discrimination can help, as they enable firms to compete in market shares without affecting their access payments. Various types of Internet interconnection are presented along with main results by Laffont, Marcus, Rey and Tirole (2001a, b) on the pricing issues of Internet interconnection.