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New Networks, Competition and Regulation

  • Pio Baake
  • Ulrich Kamecke

We consider a model with two firms operating their individual networks. Each firm can choose its price as well as its investment to build up its network. Assuming a skewed distribution of consumers, our model leads to an asymmetric market structure with one firm choosing higher investments. While access regulation imposed on the dominant firm leads to lower prices, positive welfare effects are diminished by strategic investment decisions of the firms. Within a dynamic game with indirect network effects leading to potentially increased demand, regulation can substantially lower aggregate social welfare. Conditional access holidays can alleviate regulatory failure.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.44140.de/dp568.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 568.

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Length: 30 p.
Date of creation: 2006
Date of revision:
Handle: RePEc:diw:diwwpp:dp568
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  1. Keiichi Hori & Keizo Mizuno, 2004. "Network Investment and Competition with Access-to-Bypass," Econometric Society 2004 Australasian Meetings 138, Econometric Society.
  2. Laffont, Jean-Jacques & Tirole, Jean, 1990. "Optimal Bypass and Cream Skimming," American Economic Review, American Economic Association, vol. 80(5), pages 1042-61, December.
  3. Bourreau, Marc & Dogan, Pinar, 2005. "Unbundling the local loop," European Economic Review, Elsevier, vol. 49(1), pages 173-199, January.
  4. de Bijl, P.W.J. & Peitz, M., 2004. "Unbundling the Local Loop : One-Way Access and Imperfect Competition," Discussion Paper 2004-025, Tilburg University, Tilburg Law and Economic Center.
  5. Robert S. Pindyck, 2004. "Mandatory Unbundling and Irreversible Investment in Telecom Networks," NBER Working Papers 10287, National Bureau of Economic Research, Inc.
  6. Joshua Gans & Stephen King, 2003. "Access Holidays for Network Infrastructure Investment," Monash Economics Working Papers archive-39, Monash University, Department of Economics.
  7. Hazlett Thomas W. & Havenner Arthur M., 2003. "The Arbitrage Mirage: Regulated Access Prices with Free Entry in Local Telecommunications Markets," Review of Network Economics, De Gruyter, vol. 2(4), pages 1-11, December.
  8. Bourreau, Marc & Dogan, Pinar, 2004. "Service-based vs. facility-based competition in local access networks," Information Economics and Policy, Elsevier, vol. 16(2), pages 287-306, June.
  9. Gans, Joshua S, 2001. "Regulating Private Infrastructure Investment: Optimal Pricing for Access to Essential Facilities," Journal of Regulatory Economics, Springer, vol. 20(2), pages 167-89, September.
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