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Strategic choice of financing systems in regulated and interconnected industries

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  • BASSANINI, Anna
  • POUYET, Jérôme

Abstract

The growing importance of inter-network exchanges in infrastructure-based utilities influences regulatory choices and access pricing for downstream services using the infrastructures. We analyze this problem in a setting where the infrastructure managers of two bordering countries are in charge of pricing the access to their networks. The infrastructures are used by downstream firms to provide international services that link the two countries. Network costs can be financed either through a subsidy or solely through user charges. We first characterize the strategic interaction between infrastructure managers and show that it is affected by the regulatory modes adopted in the two countries. Then, we determine the equilibrium non-cooperative choice of a financing system. As opposed to the perfect cooperation benchmark, in which subsidizing the infrastructures is socially desirable, the commitment to strict budget-balance in both countries becomes socially preferable since this alleviates the externalities generated by non-coordination between access pricing decisions.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2002017.

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Date of creation: 00 Apr 2002
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Handle: RePEc:cor:louvco:2002017

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Related research

Keywords: Ramsey pricing; interconnected networks; financing system;

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References

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  1. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  2. Philippe Gagnepain & Marc Ivaldi, 2002. "Incentive Regulatory policies: The Case of Public Transit Systems in France," Post-Print hal-00622846, HAL.
  3. Bassanini, Anna & Pouyet, Jérôme, 2003. "Strategic Choice of Financing Systems in Regulated and Interconnected Industries," CEPR Discussion Papers 3888, C.E.P.R. Discussion Papers.
  4. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  5. Ming Chang, 1996. "Ramsey pricing in a hierarchical structure with an application to network-access pricing," Journal of Economics, Springer, vol. 64(3), pages 281-314, October.
  6. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  7. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
  8. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
  9. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, December.
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Citations

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Cited by:
  1. Bruno De Borger & Fay Dunkerley & Stef Proost, 2006. "The interactin between tolls and capacity investment in serial and parallel transport networks," Center for Economic Studies - Discussion papers ces0617, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  2. Lommerud, Kjell Erik & Olsen, Trond E. & Straume, Odd Rune, 2005. "Access regulation and cross-border mergers: Is international coordination beneficial?," Discussion Papers 2005/8, Department of Business and Management Science, Norwegian School of Economics.
  3. Friebel, Guido & Ivaldi, Marc & Pouyet, Jérôme, 2011. "Separation versus Integration in International Rail Markets: A Theoretical Investigation," TSE Working Papers 11-248, Toulouse School of Economics (TSE), revised Mar 2013.
  4. Per Agrell & Jerôme Pouyet, 2004. "The Regulation of Transborder Network Services," Working Papers 2004-38, Centre de Recherche en Economie et Statistique.
  5. Vickerman, Roger, 2008. "Provision of public transport under conflicting regulatory regimes," Transportation Research Part A: Policy and Practice, Elsevier, vol. 42(9), pages 1176-1182, November.
  6. Bassanini, Anna & Pouyet, Jérôme, 2003. "Strategic Choice of Financing Systems in Regulated and Interconnected Industries," CEPR Discussion Papers 3888, C.E.P.R. Discussion Papers.
  7. Grahn-Voorneveld, Sofia, 2011. "Sharing profit in parallel and serial transport networks," Working papers in Transport Economics 2011:7, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
  8. Friebel, Guido & Ivaldi, Marc & Pouyet, Jérôme, 2011. "Competition and Industry Structure for International Rail Transportation," CEPR Discussion Papers 8491, C.E.P.R. Discussion Papers.

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