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Strategic choice of financing systems in regulated and interconnected industries

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  • Bassanini, Anna
  • Pouyet, Jerome

Abstract

The growing importance of inter-network exchanges in infrastructure-based utilities influencesregulatory choices and access pricing for downstream services using the networks. Weanalyze this problem in a setting where the infrastructure managers of two bordering countriesare in charge of pricing the access to their networks for downstream transport firms thatprovide international services. Network costs can be financed either through public fundsand user charges. Access prices are affected by the incomplete internalization of consumers’surplus and infrastructure costs; we analyze how this distortion at the access pricing levelgenerates a distortion in the levels of public funds dedicated to infrastructure financing.Because of these distortions, it turns out that in a non-cooperative setting the secondbestoutcome might consist in the simultaneous adoption of the no-subsidy system. However,multiple equilibria typically exist and the second-best outcome is never a stable equilibrium.Other properties of the different possible equilibria are studied, as well as the impact ofsupra-national policies aimed at encouraging the development of international services.The coordination problems deriving from the existence of multiple equilibria can, sometimes,be solved by separating the choice of a regulatory mode from the access pricing stage,thereby allowing the infrastructure managers to commit to use a specific financing systembefore setting the access price. However, our analysis unveils that, since the choice a regulatorymode in a country strategically affects the pricing of access in the other country,non-cooperative infrastructure managers might have free-riding incentives when decidingthe financing system for their own network.
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  • 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.
  • Handle: RePEc:eee:pubeco:v:89:y:2005:i:2-3:p:233-259
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    1. 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.
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    9. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
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    Cited by:

    1. 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.
    2. Borger Bruno De & Dunkerley Fay & Proost Stef, 2008. "The Interaction between Tolls and Capacity Investment in Serial and Parallel Transport Networks," Review of Network Economics, De Gruyter, vol. 7(1), pages 1-23, March.
    3. Vickerman, Roger, 2008. "Provision of public transport under conflicting regulatory regimes," Transportation Research Part A: Policy and Practice, Elsevier, vol. 42(9), pages 1176-1182, November.
    4. Per Agrell & Jerôme Pouyet, 2004. "The Regulation of Transborder Network Services," Working Papers 2004-38, Center for Research in Economics and Statistics.
    5. Lommerud, Kjell Erik & Olsen, Trond E. & Straume, Odd Rune, 2005. "Access regulation and cross-border mergers: Is international coordination beneficial?," Working Papers in Economics 13/05, University of Bergen, Department of Economics.
    6. De Borger, Bruno & Proost, Stef, 2012. "Transport policy competition between governments: A selective survey of the literature," Economics of Transportation, Elsevier, vol. 1(1), pages 35-48.
    7. Friebel, Guido & Ivaldi, Marc & Pouyet, Jérôme, 2011. "Competition and Industry Structure for International Rail Transportation," IDEI Working Papers 680, Institut d'Économie Industrielle (IDEI), Toulouse, revised 07 Jun 2012.
    8. Grahn-Voorneveld, Sofia, 2011. "Sharing profit in parallel and serial transport networks," Working papers in Transport Economics 2011:7, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
    9. Friebel, Guido & Ivaldi, Marc & Pouyet, Jérôme, 2011. "Separation versus Integration in International Rail Markets: A Theoretical Investigation," TSE Working Papers 11-248, Toulouse School of Economics (TSE), revised Mar 2013.

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    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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