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Strategic Choice of Financing Systems in Regulated and Interconnected Industries

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  • Anna Bassanini

    (Crest)

  • Jérôme Pouyet

    (Crest)

Abstract

The growing importance of inter-network exchanges in infrastructure-based utilities influencesregulatory choices and access pricing for downstream services using the networks. Weanalyze this problem in a setting where the infrastructure managers of two bordering countriesare in charge of pricing the access to their networks for downstream transport firms thatprovide international services. Network costs can be financed either through public fundsand user charges. Access prices are affected by the incomplete internalization of consumers’surplus and infrastructure costs; we analyze how this distortion at the access pricing levelgenerates a distortion in the levels of public funds dedicated to infrastructure financing.Because of these distortions, it turns out that in a non-cooperative setting the secondbestoutcome might consist in the simultaneous adoption of the no-subsidy system. However,multiple equilibria typically exist and the second-best outcome is never a stable equilibrium.Other properties of the different possible equilibria are studied, as well as the impact ofsupra-national policies aimed at encouraging the development of international services.The coordination problems deriving from the existence of multiple equilibria can, sometimes,be solved by separating the choice of a regulatory mode from the access pricing stage,thereby allowing the infrastructure managers to commit to use a specific financing systembefore setting the access price. However, our analysis unveils that, since the choice a regulatorymode in a country strategically affects the pricing of access in the other country,non-cooperative infrastructure managers might have free-riding incentives when decidingthe financing system for their own network.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2004-08.

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Date of creation: 2004
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Handle: RePEc:crs:wpaper:2004-08

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  1. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
  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. Ken Hendricks & Michele Piccione & Guofu Tan, 1997. "Entry and Exit in Hub-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 291-303, Summer.
  4. Bassanini, Anna & Pouyet, Jerome, 2005. "Strategic choice of financing systems in regulated and interconnected industries," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 233-259, February.
  5. 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.
  6. 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.
  7. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, December.
  8. Philippe Gagnepain & Marc Ivaldi, 2002. "Incentive Regulatory Policies: The Case of Public Transit Systems in France," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 605-629, Winter.
  9. 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.
  10. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
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Cited by:
  1. 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).
  2. Bassanini, Anna & Pouyet, Jerome, 2005. "Strategic choice of financing systems in regulated and interconnected industries," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 233-259, February.
  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. 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.
  5. DE BORGER, Bruno & DUNKERLEY, Fay & PROOST, Stef, 2006. "The interaction between tolls and capacity investment in serial and parallel transport networks," CORE Discussion Papers 2006113, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Per Agrell & Jerôme Pouyet, 2004. "The Regulation of Transborder Network Services," Working Papers 2004-38, Centre de Recherche en Economie et Statistique.
  7. Friebel, Guido & Ivaldi, Marc & Pouyet, Jérôme, 2011. "Competition and Industry Structure for International Rail Transportation," IDEI Working Papers 680, Institut d'Économie Industrielle (IDEI), Toulouse, revised 07 Jun 2012.
  8. 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.

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