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New Networks, Competition and Regulation

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  • Pio Baake
  • Ulrich Kamecke

Abstract

We consider a model with two firms operating their individual networks. Each firm can choose its price as well as its investment to build up its network. Assuming a skewed distribution of consumers, our model leads to an asymmetric market structure with one firm choosing higher investments. While access regulation imposed on the dominant firm leads to lower prices, positive welfare effects are diminished by strategic investment decisions of the firms. Within a dynamic game with indirect network effects leading to potentially increased demand, regulation can substantially lower aggregate social welfare. Conditional access holidays can alleviate regulatory failure.

Suggested Citation

  • Pio Baake & Ulrich Kamecke, 2006. "New Networks, Competition and Regulation," Discussion Papers of DIW Berlin 568, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp568
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Regulation; network effects; natural monopoly;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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