Externality Effects on the Demand and Pricing for Telecommunications

Abstract

Two types of externalities are conceivable in telecommunications: network and call externalities. The network externality represents that the benefit to a subscriber depends upon the number of subscribers. The call externality shows that recipients of calls can receive benefit without paying any usage charge.
This paper examines their effects on the demand and pricing for telecommunications services. The optimal two-part tariffs are derived for the cases: (1) both externalities are ignored; (2) only network externality is taken into account; (3) both externalities are taken into account. Compared with each other, it is shown how these externalities can affect the pricing and have the tariffs diverge from conventional rules for public utility pricing.
Telecommunications services generate benefits for at least two parties: the originator of a call and the receiver. Recent advances in telecommunications technology have proposed a new option for the tariff. Typically, the caller-ID service has enabled the recipient to know, before getting the phone, who the caller is and to exclude negative benefit calls. In some cases, the recipient is willing to receive the call and also to share the charge. Telecom companies can charge not only callers but also recipients as well. By doing so, the two types of externalities can be internalized more efficiently.