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Abstract

In this paper we consider the problem of regulating an open access essential facility. A vertically integrated firm owns an essential input and operates on the downstream market under the roof of a regulatory mechanism. There is a potential entrant in the downstream market. Both competitors use the same essential input to provide the final services to the consumers. The regulator designs a mechanism that guarantees financing of the essential input and adequate competition in the downstream market. We consider a regulatory mechanism that grants non-discriminatory access of the essential facility to a competitor. We show that this mechanism is welfare improving but it generates inefficient entry. That is a more efficient competitor may stay out of the market or a less efficient competitor may enter the market.

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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 2003084.

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Date of creation: 00 Nov 2003
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Handle: RePEc:cor:louvco:2003084

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Web page: http://www.uclouvain.be/core
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Related research

Keywords: regulation; railways; network; entry; competition; access charge; asymmetric information;

Other versions of this item:

Find related papers by JEL classification:

• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
• H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
• L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
• L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

References

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1. Caillaud, Bernard, 1990. "Regulation, competition, and asymmetric information," Journal of Economic Theory, Elsevier, vol. 52(1), pages 87-110, October.
2. Caillaud, Bernard & Tirole, Jean, 2004. "Essential facility financing and market structure," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 667-694, March.
   
   • Caillaud, Bernard & Tirole, Jean, 2001. "Essential Facility Financing and Market Structure," CEPR Discussion Papers 2802, C.E.P.R. Discussion Papers.
3. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
4. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509.
5. Jean-Jacques Laffont & Jean Tirole, 1994. "Access Pricing and Competition," Working papers 94-31, Massachusetts Institute of Technology (MIT), Department of Economics.
   
   • Laffont, Jean-Jacques & Tirole, Jean, 1994. "Access pricing and competition," European Economic Review, Elsevier, vol. 38(9), pages 1673-1710, December.
   • J-J. Laffont & J. Tirole, 1994. "Access Pricing and Competition," Working papers 95-11, Massachusetts Institute of Technology (MIT), Department of Economics.
   • Laffont, Jean-Jacques & Tirole, Jean, 1992. "Access Pricing and Competition," IDEI Working Papers 19, Institut d'Économie Industrielle (IDEI), Toulouse.
6. McAfee, R Preston & McMillan, John, 1987. "Auctions and Bidding," Journal of Economic Literature, American Economic Association, vol. 25(2), pages 699-738, June.
7. Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," IDEI Working Papers 20, Institut d'Économie Industrielle (IDEI), Toulouse.
   
   • Auriol, Emmanuelle & Laffont, Jean-Jacques, 1992. "Regulation by Duopoly," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(3), pages 507-33, Fall.
8. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
9. Campos, Javier & Cantos, Pedro, 1999. "Regulating privatized rail transport," Policy Research Working Paper Series 2064, The World Bank.

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Citations

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Cited by:

1. BLOCH, Francis & GAUTIER, Axel, 2006. "Access pricing and entry in the postal sector," CORE Discussion Papers 2006065, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
   
   • Francis Bloch & Axel Gautier, 2008. "Access Pricing and Entry in the Postal Sector," Review of Network Economics, De Gruyter, vol. 7(2), pages 3.
   • Francis Bloch & Axel Gautier, 2006. "Access Pricing and Entry in the Postal Sector," CREPP Working Papers 0606, Centre de Recherche en Economie Publique et de la Population (CREPP) (Research Center on Public and Population Economics) HEC-Management School, University of Liège.
   • Francis Bloch & Axel Gautier, 2006. "Access Pricing and Entry in the Postal Sector," Working Papers halshs-00411358, HAL.
2. Toshihiro Matsumura & Noriaki Matsushima, 2012. "Regulated Input Price, Vertical Separation, and Leadership in Free Entry Markets," ISER Discussion Paper 0853, Institute of Social and Economic Research, Osaka University.
3. GAUTIER, Axel, 2005. "Network financing with two-part and single tariff," CORE Discussion Papers 2005034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
4. Poudou, J.C. & Roland, M. & Thomas, L., 2007. "Universal Service Obligations and Competition with Asymmetric Information," Cahiers du LASER (LASER Working Papers) 2007.22, LASER (Laboratoire de Science Economique de Richter), Faculty of Economics, University of Montpellier 1.

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