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Price discrimination in access prices and final prices The following examples are intended to highlight the problems that might arise when price discrimination occurs in final prices but not in access prices. Example 1: Suppose that a telecommunications company charges a monthly fee for telephone service that depends on the class of customer. Suppose that there are two classes of customers – “residential” customers who pay $80 per month and “business” customers who pay $120 per month. The cost of providing local loops to each of these customers is $100.

With this local loop price, an entrant who targeted a type A customer would receive a profit of 160 – 120 = $40, or drive price for type A customers down to $120 if competition were robust. On the other hand, an entrant who targeted a type B customer would receive a profit of 110 – 120 = $10. Clearly, the entrants will be limited to the market for high usage customers. The incumbent is left carrying only the low usage customers for whom the average contribution of $110 is less than the incumbent’s average cost of $120.

50 ACCESS PRICING IN TELECOMMUNICATIONS – ISBN 92-64-10592-1 – © OECD 2004 1. THE THEORY OF ACCESS PRICING Box 3. ) Example 2: Suppose a local loop in a certain region costs $120 (including any fixed costs that need to be covered). Suppose that the incumbent telecommunications company charges a two part tariff for telecommunications services – the fixed subscriber charge of the incumbent is $100 and the incumbent’s usage charge per call is $1. Suppose, finally that there are two types of consumers, type A, which comprise 20% of the population which are high users, consuming 60 units of usage and type B (80% of the population) which consume 10 units of usage.

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