Information Exchange and Competition in Communications Networks

We develop a model of information exchange between calling parties. We characterize the equilibrium when two interconnected networks compete for such users by charging both for outgoing and incoming calls. We show that networks have reduced incentives to use off-net price discrimination to induce a connectivity breakdown when calls originated and received are complements in the information exchange. This breakdown disappears if operators are al-lowed to negotiate reciprocal access charges. We also study the relationship between sending and receiving retail charges as a function of the level of access charges. We identify circum-stances where private negotiations over access charges induce first-best retail prices. In other words, endogenously chosen and unregulated access charges can internalize externalities be-tween callers belonging to competing networks when firms have full pricing flexibility.