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Strategic bypass deterrence

  • BLOCH, Francis

    ()

    (Ecole Polytechnique, Paris)

  • GAUTIER, Axel

    ()

    (University of Liège, HEC, Belgium; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

In liberalized network industries, entrants can either compete for service using the existing infrastructure (access) or deploy their own infrastructure capacity (bypass). In this paper, we demonstrate that, under the threat of bypass, the access price set by an unregulated and vertically integrated incumbent is compatible with productive efficiency. This means that the entrant bypasses the existing infrastructure only if it can produce the network input more efficiently. We show that the incumbent lowers the access price compared to the ex-post efficient level to strategically deter inefficient bypass by the entrant. Accordingly, from a productive efficiency point of view, there is no need to regulate access prices when the entrant has the option to bypass. Despite that, we show that restricting the possibilities of access might be profitable for consumers and welfare because competition is fiercer under bypass.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2012062.

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Date of creation: 31 Dec 2012
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Handle: RePEc:cor:louvco:2012062
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  1. Philip Gayle & Dennis Weisman, 2007. "Are input prices irrelevant for make-or-buy decisions?," Journal of Regulatory Economics, Springer, vol. 32(2), pages 195-207, October.
  2. Francis Bloch & Axel Gautier, 2006. "Access Pricing and Entry in the Postal Sector," Working Papers halshs-00411358, HAL.
  3. Bourreau, Marc & Dogan, Pinar, 2005. "Unbundling the local loop," European Economic Review, Elsevier, vol. 49(1), pages 173-199, January.
  4. Laffont, Jean-Jacques & Tirole, Jean, 1992. "Access Pricing and Competition," IDEI Working Papers 19, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Peitz, Martin, 2005. "Asymmetric access price regulation in telecommunications markets," European Economic Review, Elsevier, vol. 49(2), pages 341-358, February.
  6. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.
  7. David Mandy, 2009. "Pricing inputs to induce efficient Make-or-Buy decisions," Journal of Regulatory Economics, Springer, vol. 36(1), pages 29-43, August.
  8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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