Abstract - Vodafone

Moving the debate forward • The Policy Paper Series • Number 8 • April 2008
Jordi Gual
Virtual private networks and
the risk of price squeezes
This report examines the economic nature of the pricing of
virtual private networks (VPNs) commonly used by Vodafone
and other telecoms operators in the Spanish telephony
industry. The price of some calls within VPNs is set below the
price of call termination charged to third parties. It has been
alleged that this practice may be detrimental to competition.
The objective of this report is to assess whether that is the
case in light of what economic analysis has to say with regard
to competition in telephony markets.
From the perspective of costs and technology,
telecommunications operators are characterized by large
fixed and sunk costs, related to the deployment of the
network, very low variable costs and the presence of
Chief Economist and Head of Research,
“la Caixa”
On-net Pricing in Mobile
Jordi Gual is Professor of Economics at IESE Business School (University of Navarra). He is also Research
Fellow of the Centre for Economic Policy Research (CEPR, London).
During the Fall of 2000 he was Visiting Professor at the Economics Department of the University of
California at Berkeley, and has been for several years the Head of the Economics Department and the
Academic Director of the research centre “Public Sector-Private Sector” at IESE Business School.
Between September 1994 and September 1996 he was Economic Adviser to the Director General for
Economic and Financial Affairs of the European Commission in Brussels. In 1999 he won the European
Investment Bank Prize for essays on European economic affairs.
His most recent books are Integration of European Banking: The Way Forward, CEPR, London (2005);
and Building a Dynamic Europe: The Key Policy Debates, Cambridge University Press, (2004).
Other recently published work includes “Integrating regulated markets in Europe” in Subsidiarity and
Economic Reform (forthcoming in Springer-Verlag); “Time to Rethink Merger Policy” in Competition Policy
International (2007); “An Economic Approach to Article 82” in Competition Policy International (2006);
“Vertical industrial policy in the EU: an empirical analysis of the effectiveness of state aid” in European
Investment Bank Papers (2006); and “Telecommunications Policies: Measurement and Determinants” in
Review of Network Economics (2006).
common costs. The nature of costs leads to the appearance
of non-linear pricing: price schedules such that prices decline
(like average costs) with usage. Faced with competitive pressure,
companies try to grab market share from competitors by
capturing heavy-use consumers with price schemes that
closely mimic the cost structure of the industry.
From the demand side, telecommunications markets are
characterized by network externalities that arise because
the users of a network derive more benefits from its use the
larger the network is. In the presence of competing networks,
operators will have an interest in developing this externality
effect, with the goal of “endogenously” generating a larger
network, and are likely to offer subscription subsidies and low
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