Termination fees revisited

Abstract

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.

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Reference

Bruno Jullien, Patrick Rey, and Wilfried Sand-Zantman, “Termination fees revisited”, International Journal of Industrial Organization, vol. 31, n. 6, November 2013, pp. 738–750.