Interconnection in Network Industries

Recent deregulation of telecommunications in the U.S. and elsewhere has highlighted the importance of interconnection in network industries. In this paper, we analyze interconnection in a deregulated network where the participants compete in the final retail market. We consider both the case of a mature industry as well as one where a new entrant challenges the incumbent. In the latter case, network externalities allow the incumbent to use the terms of interconnection to maintain its dominant position. Moreover, in either case, competition in the retail market can be undermined by collusion over access prices. We discuss the implications for some of the provisions of the new U.S. Telecommunications Act, specifically mandatory interconnection and reciprocity of tariffs, comparing these to the simple "bill and keep" rule