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The Effect of Vertically Differentiated Entry Under Retail-Minus Access Pricing

Author

Listed:
  • Byun Jeong Wook

    (Korea Information Society Development Institute (KISDI), Jincheon, South Korea)

  • Kim Sung-Hwan

    (Department of Economics, Ajou University, Suwon, South Korea)

Abstract

We examine the effect of vertically differentiated entry under retail-minus access pricing. Unlike the existing studies, we show that retail-minus regulation could obtain the intended result of reducing the retail price. This concurs to a great extent with conventional wisdom, which has been criticized, but not entirely, because the price-reducing effect in our model is not driven by competition. Such an effect is more obvious in the case of inferior-quality entry, where the lower incumbent price can help the entrant expand the market. The key is that the retail-minus rule offers the incumbent an incentive to reduce its price in order to utilize the value created by the entrant. The outcome relies on the combination of a differentiated entry and the retail-minus rule. Differentiated entry under the retail-minus rule could benefit both the incumbent and consumers because the rule protects the incumbent from business stealing while allowing value creation by the entrant.

Suggested Citation

  • Byun Jeong Wook & Kim Sung-Hwan, 2015. "The Effect of Vertically Differentiated Entry Under Retail-Minus Access Pricing," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(2), pages 747-767, April.
    • Handle: RePEc:bpj:bejeap:v:15:y:2015:i:2:p:747-767:n:12
    DOI: 10.1515/bejeap-2014-0033
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    References listed on IDEAS

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    1. Sarmento, Paula & Brandão, António, 2007. "Access pricing: A comparison between full deregulation and two alternative instruments of access price regulation, cost-based and retail-minus," Telecommunications Policy, Elsevier, vol. 31(5), pages 236-250, June.
    2. Jerry A. Hausman & J. Gregory Sidak, 2005. "Did Mandatory Unbundling Achieve Its Purpose? Empirical Evidence from Five Countries," Journal of Competition Law and Economics, Oxford University Press, vol. 1(1), pages 173-245.
    3. Weisman, Dennis L, 1995. "Regulation and the Vertically Integrated Firm: The Case of RBOC Entry into Interlata Long Distance," Journal of Regulatory Economics, Springer, vol. 8(3), pages 249-266, November.
    4. Randolph Beard, T & Kaserman, David L & Mayo, John W, 1998. "The role of resale entry in promoting local exchange competition," Telecommunications Policy, Elsevier, vol. 22(4-5), pages 315-326, May.
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    More about this item

    Keywords

    retail-minus rule; access pricing; vertical differentiation;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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