Interconnection pricing : An analysis of the efficient component pricing rule

A potential entrant wishes to offer a long-distance service by establishing its own long-distance 'upstream' facility and using the incumbent's local ('downstream') network to provide reticulation of its calls, and the issue is to determine an efficient interconnection price for the entrant's use of that facility. William Baumol has proposed the 'efficient component pricing rule' (ECPR) which is developed using a simplified railroad example. The efficient component price includes both incremental costs and overheads. Analysis of efficient interconnection pricing revolves around the definition of incremental and 'overhead' costs, and it is concluded that the ECPR does not provide an efficient basis for interconnection pricing.