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Deregulating Network Industries: Dealing with Price-Quality Tradeoffs

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  • Stefan Buehler

    ()
    (Socioeconomic Institute, University of Zurich)

  • Dennis Gaertner

    ()
    (Socioeconomic Institute, University of Zurich)

  • Daniel Halbheer

    ()
    (Socioeconomic Institute, University of Zurich)

Abstract

This paper examines the e®ects of introducing competition into monopolized network industries on prices and infrastructure quality. Analyzing a model with reduced-form demand, we ¯rst show that deregulating an integrated monopoly cannot simultaneously decrease the retail price and increase infrastructure quality. Second, we derive conditions under which reducing both retail price and infrastructure quality relative to the integrated monopoly outcome increases welfare. Third, we argue that restructuring and setting very low access charges may yield welfare losses, as infrastructure investment is undermined. We provide an extensive analysis of the linear demand model and discuss policy implications.

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File URL: http://www.soi.uzh.ch/research/wp/2004/wp0402.pdf
File Function: Revised version, 2005
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Bibliographic Info

Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0402.

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Length: 27 pages
Date of creation: Jan 2004
Date of revision: Oct 2005
Publication status: Published in Journal of Regulatory Economics 30(1), 99-115, 2006
Handle: RePEc:soz:wpaper:0402

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Keywords: infrastructure quality; deregulation; investment incentives; access charges; regulation;

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References

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  1. Reiffen, David, 1998. "A Regulated Firm's Incentive to Discriminate: A Reevaluation and Extension of Weisman's Result," Journal of Regulatory Economics, Springer, vol. 14(1), pages 79-86, July.
  2. Benz, Men-Andri & Bühler, Stefan & Schmutzler, Armin, 2003. "Infrastructure Quality in Deregulated Industries: Is there an Underinvestment Problem?," CEPR Discussion Papers 3836, C.E.P.R. Discussion Papers.
  3. Newbery, D., 1996. "Privatisation and Liberalisation of Network Utilities," Cambridge Working Papers in Economics 9620, Faculty of Economics, University of Cambridge.
  4. David Mandy & David Sappington, 2007. "Incentives for sabotage in vertically related industries," Journal of Regulatory Economics, Springer, vol. 31(3), pages 235-260, June.
  5. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  6. Spence, A Michael, 1977. "Nonprice Competition," American Economic Review, American Economic Association, vol. 67(1), pages 255-59, February.
  7. Economides, Nicholas, 1998. "The incentive for non-price discrimination by an input monopolist," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 271-284, May.
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Cited by:
  1. Growitsch, Christian & Stronzik, Marcus, 2011. "Ownership Unbundling of Gas Transmission Networks - Empirical Evidence," EWI Working Papers 2011-7, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  2. Mark Armstrong & David Sappington, 2005. "Regulation, Competition and Liberalization," Industrial Organization 0505011, EconWPA, revised 07 Oct 2005.
  3. Andreas Haller & Christian Jaag & Urs Trinkner, 2011. "Termination Charges in the International Parcel Market: Competition and Regulation," Working Papers 0028, Swiss Economics.
  4. Stefan Bühler & Simon Wey, 2010. "Demand-Enhancing Investment in Mixed Duopoly," University of St. Gallen Department of Economics working paper series 2010 2010-16, Department of Economics, University of St. Gallen.
  5. Alessandro Avenali & Giorgio Matteucci & Pierfrancesco Reverberi, 2010. "How does vertical industry structure affect investment in infrastructure quality?," DIS Technical Reports 2010-08, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  6. Andreas Haller & Christian Jaag & Urs Trinkner, 2012. "Termination Charges in the International Parcel Market," Working Papers 0033, Swiss Economics.
  7. Gugler, Klaus & Rammerstorfer, Margarethe & Schmitt, Stephan, 2013. "Ownership unbundling and investment in electricity markets — A cross country study," Energy Economics, Elsevier, vol. 40(C), pages 702-713.

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