Symbiotic Production: The Case of Telecommunications Pricing

In this paper we analyze a generalization of vertical monopolies in which monopoly suppliers trade essential inputs with one another. The most obvious applications of the model, which we call symbi-otic production, are to postal and telecommunications services. We show how producers can use per-unit tariffs to achieve cooperative outcomes without colluding directly over consumer prices. We then show the firms have an incentive to collude in the setting of tariffs but that such collusion will lower consumer prices. This assumes that the suppliers are otherwise unfettered. In contrast, if the constituent monopolies are regulated, we show that collusion enables the firms to completely undo the restraints of regulation. The model has im-portant policy implications for the international telecommunications market