Pricing in Vertically Integrated Network Switches

The size of the group varies from network to network. The same situation exists in other network businesses, including airline computer reservation systems and credit card networks. Here the author takes as parametric the size of the group that owns the upstream network, the monopoly structure of the upstream network switch, as well as the size of the downstream industry, all the members of which are connected to the switch. Given these assumptions, the author models the pricing and output behavior of the group of owners as the number of its members varies.

The analysis suggests that the more inclusive is the ownership group in a vertically integrated network, the more likely that the network adopts a flat fee (as a function of volume) pricing schedule. Also, the output of the downstream industry initially rises as the ownership group expands, but then contracts as the ownership group includes all of the downstream firms.