Full vs. Light-Handed Regulation of a Network Industry

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Full vs. Light-Handed Regulation of a Network Industry

Author Info

Joyce Sadka () (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
Jose L. Negrin () (Banco de Mexico)

Abstract

The access pricing problem emerges when a vertically integrated firm (the incumbent) provides an essential service in the upstream market, to an entrant. Both firms produce a final service and compete in the downstream market. The standard treatment of this problem has been to add the access price to the list of instruments available to a regulator who maximizes a social welfare function. Motivated by the international trend to reduce the number of prices set by regulation, we use a light handed regulation approach in which the only tool available to the regulator is the access price, and where retail prices are set by quantity competition in the downstream market. In this setup, we find that a regulator seeking to maximize total market surplus will set an access price that subsidizes the entrant, so that entrants that are less efficient than the incumbent firm can survive in the market. We then compare the outcomes of the full regulation model with those of the light-handed regulation model, in terms of final prices, firm profits, and consumer surplus. When the regulator faces incomplete information about entrant firms' costs and cannot offer a menu of contracts to potential entrants, we find examples in which light handed regulation can dominate full regulation.

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Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0403.

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Length: 18 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:cie:wpaper:0403

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-56, November.
De Fraja, Gianni, 1999. "Regulation and access pricing with asymmetric information," European Economic Review, Elsevier, vol. 43(1), pages 109-134, January. [Downloadable!] (restricted)
Other versions:
- Gianni De Fraja, . "Regulation and Access Pricing with Asymmetric Information," Discussion Papers 95/5, Department of Economics, University of York.
- De Fraja, Gianni, 1995. "Regulation and Access Pricing with Asymmetric Information," CEPR Discussion Papers 1122, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
White, L.J. & Economides, N., 1996. "The inefficiency of the ECPR Yet Again: A Reply to Larson," Working Papers 96-07, New York University, Leonard N. Stern School of Business, Department of Economics.
Other versions:
- Nicholas Economides & Lawrence J. White, 1997. "The Inefficiency of the ECPR Yet Again: A Reply to Larson," Industrial Organization 9703001, EconWPA. [Downloadable!]
King, Stephen P. & Maddock, Rodney, 1999. "Light-handed regulation of access in Australia: negotiation with arbitration," Information Economics and Policy, Elsevier, vol. 11(1), pages 1-22, March. [Downloadable!] (restricted)
Lewis, Tracy R. & Sappington, David E. M., 1999. "Access pricing with unregulated downstream competition," Information Economics and Policy, Elsevier, vol. 11(1), pages 73-100, March. [Downloadable!] (restricted)
Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 1-17, January. [Downloadable!] (restricted)
Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Blackwell Publishing, vol. 44(2), pages 131-50, June. [Downloadable!] (restricted)
Other versions:
- Armstrong, M. & Doyle, C. & Vickers, J., 1995. "The Access Pricing Problem: A Synthesis," Discussion Paper Series In Economics And Econometrics 9532, Economics Division, School of Social Sciences, University of Southampton.

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