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Strategic choice of financing systems in regulated and interconnected industries

  • Bassanini, Anna
  • Pouyet, Jerome

The growing importance of inter-network exchanges in infrastructure-based utilities influences regulatory choices and access pricing for downstream services using the infrastructures. We analyze this problem in a setting where the infrastructure managers of two bordering countries are in charge of pricing the access to their networks. The infrastructures are used by downstream firms to provide international services that link the two countries. Network costs can be financed either through a subsidy or solely through user charges. We first characterize the strategic interaction between infrastructure managers and show that it is affected by the regulatory modes adopted in the two countries. Then, we determine the equilibrium non-cooperative choice of a financing system. As opposed to the perfect cooperation benchmark, in which subsidizing the infrastructures is socially desirable, the commitment to strict budget-balance in both countries becomes socially preferable since this alleviates the externalities generated by non-coordination between access pricing decisions.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 89 (2005)
Issue (Month): 2-3 (February)
Pages: 233-259

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Handle: RePEc:eee:pubeco:v:89:y:2005:i:2-3:p:233-259
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. Ming Chang, 1996. "Ramsey pricing in a hierarchical structure with an application to network-access pricing," Journal of Economics, Springer, vol. 64(3), pages 281-314, October.
  2. Jean-Jacques Laffont & Jean Tirole, 2001. "Competition in Telecommunications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262621509, December.
  3. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  4. Bassanini, Anna & Pouyet, Jerome, 2005. "Strategic choice of financing systems in regulated and interconnected industries," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 233-259, February.
  5. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  6. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
  7. Gagnepain, P. & Ivaldi, M., 1999. "Incentive Regulatory Policies: the Case of Public Transit Systems in France," Papers 99.515, Toulouse - GREMAQ.
  8. Ken Hendricks & Michele Piccione & Guofu Tan, 1997. "Entry and Exit in Hub-Spoke Networks," RAND Journal of Economics, The RAND Corporation, vol. 28(2), pages 291-303, Summer.
  9. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  10. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
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