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

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  • 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
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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.
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