Some Aspects of Optimal Pricing for Telecommunications

The published work on telecommunications has been primarily concerned with marginal-cost pricing and the peak-load problem: externalities generated by the telephone have been ignored. This article reverses the situation by stressing two externalities -- the one created when someone makes a call and the other created when a new subscriber joins the system. The first externality represents the benefit of an incoming call to the recipient of that call, a benefit for which he does not pay. The second arises from the fact that existing subscribers do not pay for the installation of the new subscriber's phone, but do obtain a benefit because they can now call the new subscriber if they so wish. Optimal prices are obtained allowing for these externalities and a measure is developed for the total benefits of the system.