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This paper builds on the existing literature on telecommunications interconnection with non-linear pricing and heterogeneous agents, by explicitly taking into account consumersÕ participation decision. This single change leads to dramatically different conclusions regarding the scope for collusion by interconnecting networks. Ó 2004 Elsevier B.V. All rights reserved. JEL classification: L50; L96

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We analyze the effects of the adoption of real-time pricing (RTP) of electricity when generating firms have market power. We find that an increase in consumers on RTP contracts decreases peak prices and increases off-peak prices, increases consumer surplus (both for switching and non-switching consumers) and welfare, while decreasing industry profits, with these effects being magnified by the extent of market power. We illustrate these results by calibrating our model to the New Zealand electricity market, and find that taking into account the market power of generating firms increases the efficiency gains from RTP adoption by 41%. † Authors' affiliations: