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Full vs. Light-Handed Regulation of a Network Industry

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Author Info
Joyce Sadka. Jose Luis Negrin
Abstract

The 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

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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 257.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:257

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Related research
Keywords: 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

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  1. De Fraja, Gianni, 1999. "Regulation and access pricing with asymmetric information," European Economic Review, Elsevier, vol. 43(1), pages 109-134, January. [Downloadable!] (restricted)
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  2. White, L.J. & Economides, N., 1996. "The inefficiency of the ECPR Yet Again: A Reply to Larson," Working Papers 96-07, New York University, Leonard N. Stern School of Business, Department of Economics.
    Other versions:
  3. 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. [Downloadable!] (restricted)
  4. Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Blackwell Publishing, vol. 62(1), pages 1-17, January. [Downloadable!] (restricted)
  5. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Blackwell Publishing, vol. 44(2), pages 131-50, June. [Downloadable!] (restricted)
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  6. Nicholas Economides & Lawrence J. White, 1995. "Access and Interconnection Pricing: How Efficient is the Efficient Component Pricing Rule?," Working Papers 95-04, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
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  7. 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.
  8. 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. [Downloadable!] (restricted)
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