Full vs. Light-Handed Regulation of a Network Industry
AbstractThe access pricing problem emerges when a vertically integrated firm (the incumbent) provides an essential service in the upstream market, to an entrant. Both firms produce a final service and compete in the downstream market. The standard treatment of this problem has been to add the access price to the list of instruments available to a regulator who maximizes a social welfare function. Motivated by the international trend to reduce the number of prices set by regulation, we use a light handed regulation approach in which the only tool available to the regulator is the access price, and where retail prices are set by quantity competition in the downstream market. In this setup, we find that a regulator seeking to maximize total market surplus will set an access price that subsidizes the entrant, so that entrants that are less efficient than the incumbent firm can survive in the market. We then compare the outcomes of the full regulation model with those of the light-handed regulation model, in terms of final prices, firm profits, and consumer surplus. When the regulator faces incomplete information about entrant firms' costs and cannot offer a menu of contracts to potential entrants, we find examples in which light handed regulation can dominate full regulation
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 257.
Date of creation: 11 Aug 2004
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Regulation; essential input; access pricing; vertical integration; regulatory discretion;
Find related papers by JEL classification:
- K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Fraja, Gianni, 1999.
"Regulation and access pricing with asymmetric information,"
European Economic Review,
Elsevier, vol. 43(1), pages 109-134, January.
- Gianni De Fraja, . "Regulation and Access Pricing with Asymmetric Information," Discussion Papers 95/5, Department of Economics, University of York.
- De Fraja, Gianni, 1995. "Regulation and Access Pricing with Asymmetric Information," CEPR Discussion Papers 1122, C.E.P.R. Discussion Papers.
- 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.
- Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 1-17, January.
- King, Stephen P. & Maddock, Rodney, 1999. "Light-handed regulation of access in Australia: negotiation with arbitration," Information Economics and Policy, Elsevier, vol. 11(1), pages 1-22, March.
- Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-56, November.
- Armstrong, M. & Doyle, C. & Vickers, J., 1995.
"The access pricing problem: a synthesis,"
Discussion Paper Series In Economics And Econometrics
9532, Economics Division, School of Social Sciences, University of Southampton.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.