al to the negative of total demand, By(p,m)=-D(p,m). = - 21 Differentiating consumer benefits with respect to m gives Thus, Bm is positive because u( (Q(p+tr)) -trQ(p+tr)-pQ(p+tr) is - a decreasing func- tion of r. Networks in Telecommunications AC(Q) D(p, m) Figure 3.18. The free-entry condition with monopolistic competition between networks in the traditional Chamberlain model. The socially optimal extent of product variety is examined for the case of second-best pricing. Suppose that there are m networks and that each of them breaks even at the common price p. Because of the symmetry of the distribution of consumer preferences, each network has the same share of total demand. The break-even profit condition is therefore ( p-c)D(p,m)/m-C=0 This determines a break-even price p*(m), which depends on the number of net- works. It can be shown that the break-even price is increasing in the number of networks. Even though greater product variety increases consumer demand, which helps each network take advantage of economies of scale, greater product vari- ety also means that the fixed cost of each network must be shared among fewer consumers. The efficient number of networks is calculated by substituting the break-even price into total consumer benefits and maximizing over the number of networks. The efficient number of networks reflects the trade-off between higher prices to cover costs and the returns to variety, - = m). Consider a competitive equilibrium with monopolistic competition. 22 Com- petitive entry drives down profit until the break-even profit condition holds; see Figure 3.18. Firms compete on prices because raising one's price drives consumers 22 For a preliminary assessment, see Yoo (2005). Pricing Network Services toward the nearest substitute good. At an equilibrium with symmetric pricing strategies, firms choose prices such that prices exceed marginal cost: 23 -after This condition, combined with the break-even profit condition, determines the equilibrium price pc and the number of networks mc. Gene