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Strategic Bypass Deterrence

  • Francis Bloch

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Axel Gautier

    (HEC-University of Liège - Department of Economics, CORE - Center of Operation Research and Econometrics [Louvain] - Université Catholique de Louvain)

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 effi ciency. This means that the entrant bypasses the existing infrastructure only if it can produces the network input more effi ciently. We show that the incumbent lowers the access price compared to the ex-post effi cient level to strategically deter ineffi cient bypass by the entrant. Accordingly, from a productive effi ciency 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 profi table for consumers and welfare because competition is fi ercer under bypass.

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Paper provided by HAL in its series Working Papers with number hal-00749318.

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Date of creation: 07 Nov 2012
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Handle: RePEc:hal:wpaper:hal-00749318
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  1. Laffont, Jean-Jacques & Tirole, Jean, 1992. "Access Pricing and Competition," IDEI Working Papers 19, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. BLOCH, Francis & GAUTIER, Axel, . "Access pricing and entry in the postal sector," CORE Discussion Papers RP -2059, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Bourreau, Marc & Dogan, Pinar, 2005. "Unbundling the local loop," European Economic Review, Elsevier, vol. 49(1), pages 173-199, January.
  4. 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.
  5. 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.
  6. David Mandy, 2009. "Pricing inputs to induce efficient Make-or-Buy decisions," Journal of Regulatory Economics, Springer, vol. 36(1), pages 29-43, August.
  7. Peitz, Martin, 2005. "Asymmetric access price regulation in telecommunications markets," European Economic Review, Elsevier, vol. 49(2), pages 341-358, February.
  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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