Strategic Bypass Deterrence
AbstractIn liberalized network industries, entrants can either compete for service using the existing infrastructure (access) or deploy their own infrastructure capacity (bypass). In this paper, we demonstrate that, under the threat of bypass, the access price set by an unregulated and vertically integrated incumbent is compatible with productive effi ciency. This means that the entrant bypasses the existing infrastructure only if it can produces the network input more effi ciently. We show that the incumbent lowers the access price compared to the ex-post effi cient level to strategically deter ineffi cient bypass by the entrant. Accordingly, from a productive effi ciency point of view, there is no need to regulate access prices when the entrant has the option to bypass. Despite that, we show that restricting the possibilities of access might be profi table for consumers and welfare because competition is fi ercer under bypass.
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Date of creation: 07 Nov 2012
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Make-or-buy; Access price; Bypass;
Other versions of this item:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-17 (All new papers)
- NEP-COM-2012-11-17 (Industrial Competition)
- NEP-REG-2012-11-17 (Regulation)
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