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Pricing Access to a Monopoly Input

Author

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  • David S. Sibley
  • Michael J. Doane
  • Michael A. Williams
  • Shu‐Yi Tsai

Abstract

What price should downstream entrants pay a vertically integrated incumbent monopoly for use of its assets? Courts, legislators, and regulators have at times mandated that incumbent monopolies lease assets required for the production of a retail service to entrants in efforts to increase the competitiveness of retail markets. This paper compares two rules for pricing such monopoly inputs: marginal cost pricing (MCP) and generalized efficient component pricing rule (GECPR). The GECPR is not a fixed price, but is a rule that determines the input price to be paid by the entrant from the entrant's retail price. Comparing the retail market equilibrium under MCP and GECPR, the GECPR leads to lower equilibrium retail prices. If the incumbent is less efficient than the entrant, the GECPR also leads to lower production costs than does the MCP rule. If the incumbent is more efficient than the entrant, however, conditions may exist in which MCP leads to lower production costs than does the GECPR. The analysis is carried out assuming either Bertrand competition, quantity competition, or monopolistic competition between the incumbent and entrant in the downstream market.

Suggested Citation

  • David S. Sibley & Michael J. Doane & Michael A. Williams & Shu‐Yi Tsai, 2004. "Pricing Access to a Monopoly Input," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 6(4), pages 541-555, October.
    • Handle: RePEc:bla:jpbect:v:6:y:2004:i:4:p:541-555
    DOI: 10.1111/j.1467-9779.2004.00179.x
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    References listed on IDEAS

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    1. Spulber, Daniel F & Sidak, J Gregory, 1997. "Network Access Pricing and Deregulation," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 6(4), pages 757-782, December.
    2. Simon, Leo K & Stinchcombe, Maxwell B, 1995. "Equilibrium Refinement for Infinite Normal-Form Games," Econometrica, Econometric Society, vol. 63(6), pages 1421-1443, November.
    3. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
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    Cited by:

    1. Doh-Shin Jeon & Sjaak Hurkens, 2007. "A Retail Benchmarking Approach to Efficient Two-way Access Pricing: Two-Part Tariffs," Working Papers 07-11, NET Institute, revised Sep 2007.
    2. Sue Mialon, 2007. "Pricing access in network competition," Journal of Regulatory Economics, Springer, vol. 31(1), pages 109-123, February.
    3. Doh‐Shin Jeon & Sjaak Hurkens, 2008. "A retail benchmarking approach to efficient two‐way access pricing: no termination‐based price discrimination†," RAND Journal of Economics, RAND Corporation, vol. 39(3), pages 822-849, September.
    4. Weisman, Dennis L., 2001. "Access pricing and exclusionary behavior," Economics Letters, Elsevier, vol. 72(1), pages 121-126, July.

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