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Full vs. Light-Handed Regulation of a Network Industry

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  • Joyce Sadka. Jose Luis Negrin

Abstract

The access pricing problem emerges when a vertically integrated firm (the incumbent) provides an essential service in the upstream market, to an entrant. Both firms produce a final service and compete in the downstream market. The standard treatment of this problem has been to add the access price to the list of instruments available to a regulator who maximizes a social welfare function. Motivated by the international trend to reduce the number of prices set by regulation, we use a light handed regulation approach in which the only tool available to the regulator is the access price, and where retail prices are set by quantity competition in the downstream market. In this setup, we find that a regulator seeking to maximize total market surplus will set an access price that subsidizes the entrant, so that entrants that are less efficient than the incumbent firm can survive in the market. We then compare the outcomes of the full regulation model with those of the light-handed regulation model, in terms of final prices, firm profits, and consumer surplus. When the regulator faces incomplete information about entrant firms' costs and cannot offer a menu of contracts to potential entrants, we find examples in which light handed regulation can dominate full regulation

Suggested Citation

  • Joyce Sadka. Jose Luis Negrin, 2004. "Full vs. Light-Handed Regulation of a Network Industry," Econometric Society 2004 Latin American Meetings 257, Econometric Society.
  • Handle: RePEc:ecm:latm04:257
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    File URL: http://repec.org/esLATM04/up.19980.1082065899.pdf
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    References listed on IDEAS

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    1. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-150, June.
    2. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-256, November.
    3. De Fraja, Gianni, 1999. "Regulation and access pricing with asymmetric information," European Economic Review, Elsevier, vol. 43(1), pages 109-134, January.
    4. John Vickers, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 1-17.
    5. Lewis, Tracy R. & Sappington, David E. M., 1999. "Access pricing with unregulated downstream competition," Information Economics and Policy, Elsevier, vol. 11(1), pages 73-100, March.
    6. King, Stephen P. & Maddock, Rodney, 1999. "Light-handed regulation of access in Australia: negotiation with arbitration," Information Economics and Policy, Elsevier, vol. 11(1), pages 1-22, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Regulation; essential input; access pricing; vertical integration; regulatory discretion;

    JEL classification:

    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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