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The Optimal Access Price in a Vertically Related Industry

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  • Gangopadhyay, Partha

    (School of Economics and Finance, University of Western Sydney, New South Wales)

Abstract

In important component of the National Competition Policy is the regulation of access prices for major infrastructure facilities. The primary goal of regulation is to protect rival firms from anti-competitive measures of the owners of such facilities. It is commonly held that the regulation of access price does not necessarily benefit the non-integrated downstream rivals, since the access price may act as a collusive device to restrict output in the downstream market that will enhance profits accruing to all competitors. We contest this important finding: we develop a sequential game to examine an industry characterised by naturally monopolistic and potentially competitive activities that are vertically related. We establish that in the perfect Nash equilibrium of the proposed game the intergraded firm has an incentive and an ability to use the access price in the upstream market to the detriment of its rivals. It is hence essential to regulate access prices in such markets to protect non-integrated rivals and to promote competition.

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Bibliographic Info

Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal Economic Analysis and Policy (EAP).

Volume (Year): 35 (2005)
Issue (Month): 1-2 (March/September)
Pages: 91-102

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Handle: RePEc:eap:articl:v:35:y:2005:i:1-2:p:91-102

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Related research

Keywords: Firm; Firms; Infrastructure; Policy; Regulation;

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References

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  1. Partha Gangopadhyay, 2000. "On the coase theorem and coalitional stability: the principle of equal relative concession," Theory and Decision, Springer, vol. 48(2), pages 179-191, March.
  2. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  3. King, S-P, 1997. "Access Pricing under Rate-of-Return Regulation," CEPR Discussion Papers 366, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  4. Brennan, Timothy J, 1989. "Regulating by Capping Prices," Journal of Regulatory Economics, Springer, vol. 1(2), pages 133-47, June.
  5. Damania, D, 1996. "The Scope for Collusion and Competition in a Regulated Vertically Integrated Industry," Bulletin of Economic Research, Wiley Blackwell, vol. 48(3), pages 253-64, July.
  6. Mark Armstrong & Simon Cowan & John Vickers, 1994. "Regulatory Reform: Economic Analysis and British Experience," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262510790, December.
  7. Partha Gangopadhyay, 2004. "Strategic Manipulation and Information Market Microstructure," Australian Economic Papers, Wiley Blackwell, vol. 43(1), pages 75-86, 03.
  8. Cabral, Luis M B & Riordan, Michael H, 1989. "Incentives for Cost Reduction under Price Cap Regulation," Journal of Regulatory Economics, Springer, vol. 1(2), pages 93-102, June.
  9. Partha Gangopadhyay, 2007. "Competitive Tax Evasion And Transfer Prices," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 347-351.
  10. Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 1-17, January.
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