Telecommunications Services and Multi-Unit Firms: Inside the Black-Box

This paper analyses telecommunications demand by firms, focusing on communication flows among production units. We consider first the case of two business units, that can be symmetric or in a leader/follower situation regarding their communication decisions. In this context, we define the network effect as the advantage a production unit obtains by using an input whose costs are shared by another user: this may create the opportunity of free-riding, thus lowering the usage of telecommunications services. The model is then generalised, taking into account indirect links among production units: here the free riding or network effect can be counterbalanced by the usage effect, i.e. the advantage of direct links. The theoretical framework we suggest not only explains business telecommunications usage by multi-unit firms, but also sheds light on the complex relationship between firms’ internal organisation and communication flows.