Price discrimination in a network: a model of telecommunications networks

Abstract

This thesis considers access pricing and consumer pricing problems of telecommunications firms as a context to analyze the effects of a network structure on firms' equilibrium strategies in Bertrand competition. The ability of competitors to route connections to a given player to replicate a direct link provides a constraint on said player's ability to price discriminate between connections over different links. The thesis shows that, in equilibrium, firms create incentives to originate only direct connections, as long as direct connections have lower physical costs than indirect alternatives which is shown to be a necessary condition. An example is analyzed to illustrate a case where an indirect connection may be optimal. As in the usual price discrimination models, agents with sufficiently low demand will be left out of the market, but if they incur sufficiently low costs from connections they will be routing other agents' connections.