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Strategic Bypass Deterrence

Author

Listed:
  • Francis Bloch

    (X-DEP-ECO - Département d'Économie de l'École Polytechnique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris)

  • Axel Gautier

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

Abstract

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.

Suggested Citation

  • Francis Bloch & Axel Gautier, 2012. "Strategic Bypass Deterrence," Working Papers hal-00749318, HAL.
    • Handle: RePEc:hal:wpaper:hal-00749318
    Note: View the original document on HAL open archive server: https://hal.science/hal-00749318
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    References listed on IDEAS

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    1. Laffont, Jean-Jacques & Tirole, Jean, 1994. "Access pricing and competition," European Economic Review, Elsevier, vol. 38(9), pages 1673-1710, December.
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    Cited by:

    1. Malin Arve & Øystein Foros & Hans Jarle Kind, 2022. "Access price structure and entrant build-or-buy incentives in mobile markets," Journal of Regulatory Economics, Springer, vol. 61(1), pages 67-87, February.
    2. 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.

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    More about this item

    Keywords

    Make-or-buy; Access price; Bypass;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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