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Shared ownership and pricing in a network switch

Author: McAndrews, J. J ; Rob, RafaelINSEAD Area: Economics and Political Science Series: Working Paper ; 96/07/EPS Publisher: Fontainebleau : INSEAD, 1996.Language: EnglishDescription: 20 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: We observe that many wholesale switches in ATM networks are jointly owned by their members and that this tends to occur more frequently when the wholesale industry is highly concentrated. We also observe that network swithches are "natural monopolies", their costs being largely fixed and their demand exhibiting substantial network externalities. Motivated by these observations, we model the competition for members between wholesale switches and the role joint ownership can play in attracting members. The model analyses both the adoption decision (which network a bank chooses to join) and the subsequent pricing of switch and ATM services. We compare competition between two solely owned and one jointly owned switch. Our analysis shows that a more concentrated structure results under the latter and that retail are higher. This calls into question the leniency of antitrust policy toward jointly owned structures
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We observe that many wholesale switches in ATM networks are jointly owned by their members and that this tends to occur more frequently when the wholesale industry is highly concentrated. We also observe that network swithches are "natural monopolies", their costs being largely fixed and their demand exhibiting substantial network externalities. Motivated by these observations, we model the competition for members between wholesale switches and the role joint ownership can play in attracting members. The model analyses both the adoption decision (which network a bank chooses to join) and the subsequent pricing of switch and ATM services. We compare competition between two solely owned and one jointly owned switch. Our analysis shows that a more concentrated structure results under the latter and that retail are higher. This calls into question the leniency of antitrust policy toward jointly owned structures

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