“Bargaining or regulation?”

Abstract

Bargaining on network usage between network owner and service provider may arise as a major issue in newly created markets of telecommunications industry. To study the bargaining situation between network owner with essential facility ownership and service provider with information power, ultimatum game model with incomplete information is applied. In new markets, where incomplete information on the market situation exists, the bargaining result is not always favorable to the network owner as is in the complete information case. In addition, in the incomplete information case, players may fail to agree due to lack of full information. In that case, the model says regulator’s price-fixing minimizes the cost of rejection. This finding is distinguishable from other studies which tell that regulation discourages competition in telecommunications. Finally, regulation is more effective than autonomous decision-making under certain conditions; when probability distribution is not biased enough to either high demand state or low state, and when high-cost type network owners exist in a large portion in the society.