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Sender or Receiver: Who Should Pay to Exchange an Electronic Message?

Author

Listed:
  • Benjamin E. Hermalin

    (University of California, Berkeley)

  • Michael L. Katz

    (University of California, Berkeley)

Abstract

We examine the pricing implications of call externalities, the benefits enjoyed by the recipient of a message sent by another user. We show that, with or without a network-profitability constraint, efficient pricing requires consideration of demands, as well as costs. We present conditions under which equal charges for sending and receiving calls maximize welfare and profits. We also present conditions under which the receiving party's subsidizing the sender maximizes welfare and profits. Last, we show that menus of pricing options can increase welfare and profits. None of these findings holds in the absence of call externalities.

Suggested Citation

  • Benjamin E. Hermalin & Michael L. Katz, 2004. "Sender or Receiver: Who Should Pay to Exchange an Electronic Message?," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 423-447, Autumn.
    • Handle: RePEc:rje:randje:v:35:y:2004:3:p:423-447
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