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Network Investment and Competition with Access-to-Bypass

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Author Info

  • Keiichi Hori
  • Keizo Mizuno

Abstract

This paper examines firms' incentive to make irreversible investments under an open access policy with stochastically growing demand. Using a simple model, we derive an access-to-bypass equilibrium. Analysis of the equilibrium confirms that the introduction of competition in network industries makes a firm's incentive to make investments greater than those of a monopolist. We then show that a change in access charges induces a trade-off in social welfare. That is, a decrease in the access charge expands a social benefit flow in the access duopoly, and deters not only the introduction of a new network facility, but also a positive network externality generated by the construction of an additional bypass network. The feasibility of the socially optimal investment timing is then discussed

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File URL: http://repec.org/esAUSM04/up.21215.1077593019.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 138.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:ausm04:138

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Related research

Keywords: Open access policy; Investment; Real options; Network facility; Access charge;

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References

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  1. Steven R. Grenadier, 2002. "Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 691-721.
  2. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
  3. Armstrong, Mark & Vickers, John, 1998. "The Access Pricing Problem with Deregulation: A Note," Journal of Industrial Economics, Wiley Blackwell, vol. 46(1), pages 115-21, March.
  4. 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.
  5. Gans, Joshua S & Williams, Philip L, 1999. "Access Regulation and the Timing of Infrastructure Investment," The Economic Record, The Economic Society of Australia, vol. 75(229), pages 127-37, June.
  6. Nielsen, Martin J., 2002. "Competition and irreversible investments," International Journal of Industrial Organization, Elsevier, vol. 20(5), pages 731-743, May.
  7. Gans, Joshua S, 2001. "Regulating Private Infrastructure Investment: Optimal Pricing for Access to Essential Facilities," Journal of Regulatory Economics, Springer, vol. 20(2), pages 167-89, September.
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Cited by:
  1. Vareda, João & Hoernig, Steffen, 2007. "The race for telecoms infrastructure investment with bypass: Can access regulation achieve the first best?," FEUNL Working Paper Series wp524, Universidade Nova de Lisboa, Faculdade de Economia.
  2. Pio Baake & Ulrich Kamecke, 2006. "New Networks, Competition and Regulation," Discussion Papers of DIW Berlin 568, DIW Berlin, German Institute for Economic Research.
  3. Christian Wey & Pio Baake & Ulrich Kamecke, 2005. "Neue Märkte unter dem neuen Rechtsrahmen: Endbericht ; Forschungsprojekt im Auftrag der Deutsche Telekom AG," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 6, number pbk6, May.

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