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On the problem of network monopoly

McHardy, Jolian; Reynolds, Michael; Trotter, Steve; Trotter, Stephen

Authors

Jolian McHardy

Michael Reynolds

Dr Steve Trotter S.D.Trotter@hull.ac.uk
Lecturer/ Director of Learning and Teaching for the Business School

Dr Steve Trotter S.D.Trotter@hull.ac.uk
Lecturer/ Director of Learning and Teaching for the Business School



Abstract

We consider the problem of pricing in a network industry focussing in particular on the issue of cross-network pricing (e.g. cross-network cell phone charges). Economic theory tells us in relation to cross-network pricing that collusion or network monopoly may yield welfare as well as profit benefits although any welfare benefits from cross-network collusion may be more than offset by a reduction in competition elsewhere. To address this, we introduce a new regulatory concept: the independent profit-maximising agent. The agent sets prices on cross-network goods taking either (i) a complete, or (ii) an arbitrarily small, share of the associated profit. We examine welfare and profits with and without agent type (i) and (ii) with collusion (network monopoly) between the non-agent firms and without collusion (independent network duopoly).We show that splitting up the network monopoly (creating independent network duopoly) may be inferior for both society and firm(s) compared with a network monopoly 'regulated' by an agent and that society always prefers any of the four agent regimes over network monopoly and network duopoly. Indeed, employing the agent may reduce welfare losses by a large proportion while having relatively little effect on profit. © 2012 Springer Science+Business Media New York.

Journal Article Type Article
Publication Date 2012-08
Journal THEORY AND DECISION
Print ISSN 0040-5833
Electronic ISSN 1573-7187
Publisher Springer Publishing Company
Peer Reviewed Peer Reviewed
Volume 73
Issue 2
Pages 223-248
APA6 Citation McHardy, J., Reynolds, M., & Trotter, S. (2012). On the problem of network monopoly. Theory and decision, 73(2), (223-248). doi:10.1007/s11238-012-9303-x. ISSN 0040-5833
DOI https://doi.org/10.1007/s11238-012-9303-x
Keywords Network monopoly; Regulatory agent; Welfare; Pricing
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