Reconciling the off-net cost pricing principle with efficient network utilization

The off-net-cost pricing principle argues that under a broad range of environments a positive “access” charge paid by originating networks to interconnected terminating networks would cause networks to set on-net usage charges equal to off-net rates, and that these charges would fully reflect the access charge. However, other results in the literature provide reasonable conditions under which on-net usage charges will not reflect access charges, but would be set to induce the social surplus maximizing level of on-net usage. This paper harmonizes these two apparently opposing results by showing that retail usage charges depend on two effects. One is a rent seeking effect on the part of networks and the other is an efficient utilization effect. In models in which the rent seeking effect is more important, on-net usage charges will tend to equal their off-net usage charges and incorporate the access charge. In models in which the efficient utilization effect matters more, off-net usage charges will reflect access charges, but onnet usage charges will not be affected by the level of access charges, but instead will tend to be set at the levels that promote efficient on-net utilization.