Access and Interconnection Pricing: How Efficient is the “Efficient Component Pricing Rule”?

• Author: Nicholas Economides,Lawrence J. White
• DOI: 10.1177/0003603X9504000305
• Published date: 01 September 1995
• Date: 01 September 1995
• Subject Matter: Competition and Interconnection in Local Telephony

The Antitrust Bulletin/Fall 1995 557

Access and interconnection pricing:

how

efficient is the "efficient

component pricing rule"?

BY NICHOLAS ECONOMIDES* and LAWRENCE J. WHITE*

1. Introduction

The question of how a monopolist owner of a bottleneck facility

should set the price for access to the facility by an entrant or rival

supplier of a complementary component continues to be an inter-

esting question for theory and policy.' This question is often

*Stem School of Business, New York University, NY.

AUTHORS' NOTE: The authors thank Timothy Brennan

for

helpful com-

ments on an earlier draft

of

this article. The authors also thank the par-

ticipants at the CEPRICREST-LEI conference on Mobile Telephony, the

Utilities Regulation Network conference at the Catholic University

of

Milan,

and

of

the 1995

Annual

National

Conference

of

Economic

Research in France for helpful comments and suggestions.

See William J. Baumol, Some Subtle Issues in Railroad Deregula-

tion, 10

INT.

J.

TRANS.

Bcox. 341 (1983); Telecom Corporation

of

New

Zealand and Others v. Clear Communications Ltd, Privy Council, House

of Lords, U.K. (1994), Curtis M. Grimm &Robert G. Harris, Vertical

Foreclosure in the Rail Freight Industry: Economic Analysis and Policy

Implications, 5 ICC

PRACT.

J. 508 (1983); Henry McFarland, Railroad

© !995 by Federal Legal Publications, Inc.

558

The antitrust bulletin

framed in terms of a regulated monopolist vis-a-vis an entrant or

rival in an unregulated complementary activity; but the issue can

also arise in the antitrust context

of

an unregulated "essential

facility" monopolist that is vertically integrated into a comple-

mentary upstream or downstream activity in which one or more

other producers are present (or may enter)."

As technological changes and legal-regulatory changes have

created more opportunities for competition in activities that are

complementary to a still-regulated bottleneck facility, the policy

relevance

of

the access pricing question has been heightened.

Familiar examples include:

Local telephone service entrants who must route calls to and from

the

customers

of

the

incumbent

(bottleneck

monopoly)

provider

through the incumbent's switches.

Long-distance

telephone

service

providers

who

must

access cus-

tomers

via

the

local

(monopoly)

switched

network;

this

example

extends immediately to other providers

of

complementary telephone

services. In these instances, the local monopolist is usually also an

actual or potential provider

of

the long-distance and

other

comple-

mentary services.

Competitive

Access: An Economic Analysis, mimeo (1985); Nicholas

Economides &Glenn Woroch, Benefits and Pitfalls

of

Network Intercon-

nection, mimeo (1992);

WILLIAM

J.

BAUMOL

&

GREGORY

SIDAK,

TOWARD

COMPETmON

IN

LOCAL

TELEPHONY

(1994); William J. Baumol &Gregory

Sidak, The Pricing

of

Inputs Sold to Competitors, 11

YALE

J.

REG.

171

(1994); Alfred E. Kahn & William E. Taylor, The Pricing

of

Inputs Sold

to Competitors: Comment, 11

YALE

J.

REG.

225 (1994); Henry Ergas &

Eric

Ralph,

Pricing

Interconnection:

Is

the

Baumol-

Willig

Rule

the

Answer? mimeo (1994);

Mark

Armstrong &Chris Doyle, Interconnec-

tion and the Effects

of

Entry, mimeo (1994); Jean-Jacques

Laffont

&

Jean Tirole, Access Pricing and Competition, 38

EURO. ECON.

REv. 1673

(1994); and Mark Armstrong &John Vickers, The Predatory Access Pric-

ing Problem, mimeo (1994).

2

For

recent discussions

of

the essential facilities doctrine, see Gre-

gory Werden, The Law and Economics

of

the Essential Facilities Doc-

trine, 32 ST.

LOUIS

U. L. REv. 432 (1987); James Ratner, Should There Be

an Essential Facilities Doctrine?, 21 U. c.,

DAVIS

L. REv. 327 (1988);

and

David

Reiffen

&

Andrew

N. Kleit, Terminal Railroad Revisited:

Foreclosure

of

an Essential Facility or Simply Horizontal Monopoly?, 33

J. L. &

ECON.

419 (1990).