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Overusing a bypass under cost-based access regulation: underinvestment with spillovers

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  • Keizo Mizuno

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  • Ichiro Yoshino

Abstract

We explain how underinvestment in infrastructure upgrades is aggravated under access regulation with a cost-based access charge. When a cost-based access charge is imposed on an incumbent, the incumbent has a weak incentive to invest in infrastructure upgrades due to insufficient rewards for the investment. Then, the incumbent’s underinvestment induces the overuse of a bypass by an entrant that chooses productively efficient technology, when the degree of spillover is large, the production cost of the bypass is low, and the incumbent’s investment cost is high. The overuse of a bypass decreases the incumbent’s profits, which further reduces the incumbent’s incentive for investment. Thus, the overuse of a bypass generates a vicious cycle of underinvestment in infrastructure upgrades. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Keizo Mizuno & Ichiro Yoshino, 2015. "Overusing a bypass under cost-based access regulation: underinvestment with spillovers," Journal of Regulatory Economics, Springer, vol. 47(1), pages 29-57, February.
  • Handle: RePEc:kap:regeco:v:47:y:2015:i:1:p:29-57
    DOI: 10.1007/s11149-014-9259-6
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    References listed on IDEAS

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    More about this item

    Keywords

    A cost-based access charge; Bypass; Underinvestment; L43; L51; L96;

    JEL classification:

    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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