Termination fees revisited

- The paper analyzes network reciprocal termination fees with heterogenous consumers.
- The profit-maximizing (PM) level is above the marginal cost of termination.
- The welfare-maximizing (WM) level is also above cost.
- Without termination-based price discrimination, the WM level is below the PM level.
- The conclusions are robust in considering endogenous utility for receiving calls.

We reconsider the question of the optimal level of termination fees between communication networks in the context of heterogeneous usage and elastic participation. The interaction between these two features yields new insights; in our model: i) The profit maximizing reciprocal termination fee is above marginal cost; ii) the welfare maximizing termination fee is also above cost; iii) the welfare-maximizing termination fee is below the profit-maximizing one in the absence of termination-based price discrimination, but can be above it otherwise.