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Deregulating Network Industries: Dealing with Price-Quality Tradeoffs

Author

Listed:
  • Stefan Buehler

    () (Socioeconomic Institute, University of Zurich)

  • Dennis Gaertner

    () (Socioeconomic Institute, University of Zurich)

  • Daniel Halbheer

    () (Socioeconomic Institute, University of Zurich)

Abstract

This paper examines the e�ects of introducing competition into monopolized network industries on prices and infrastructure quality. Analyzing a model with reduced-form demand, we �rst show that deregulating an integrated monopoly cannot simultaneously decrease the retail price and increase infrastructure quality. Second, we derive conditions under which reducing both retail price and infrastructure quality relative to the integrated monopoly outcome increases welfare. Third, we argue that restructuring and setting very low access charges may yield welfare losses, as infrastructure investment is undermined. We provide an extensive analysis of the linear demand model and discuss policy implications.

Suggested Citation

  • Stefan Buehler & Dennis Gaertner & Daniel Halbheer, 2004. "Deregulating Network Industries: Dealing with Price-Quality Tradeoffs," SOI - Working Papers 0402, Socioeconomic Institute - University of Zurich, revised Oct 2005.
  • Handle: RePEc:soz:wpaper:0402
    as

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    File URL: http://www.econ.uzh.ch/static/wp_soi/wp0402.pdf
    File Function: Revised version, 2005
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    References listed on IDEAS

    as
    1. Buehler, Stefan & Schmutzler, Armin & Benz, Men-Andri, 2004. "Infrastructure quality in deregulated industries: is there an underinvestment problem?," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 253-267, February.
    2. David Mandy & David Sappington, 2007. "Incentives for sabotage in vertically related industries," Journal of Regulatory Economics, Springer, vol. 31(3), pages 235-260, June.
    3. Newbery, David M., 1997. "Privatisation and liberalisation of network utilities," European Economic Review, Elsevier, vol. 41(3-5), pages 357-383, April.
    4. Reiffen, David, 1998. "A Regulated Firm's Incentive to Discriminate: A Reevaluation and Extension of Weisman's Result," Journal of Regulatory Economics, Springer, vol. 14(1), pages 79-86, July.
    5. Mandy, David M, 2000. "Killing the Goose That May Have Laid the Golden Egg: Only the Data Know Whether Sabotage Pays," Journal of Regulatory Economics, Springer, vol. 17(2), pages 157-172, March.
    6. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    7. Beard, T Randolph & Kaserman, David L & Mayo, John W, 2001. "Regulation, Vertical Integration and Sabotage," Journal of Industrial Economics, Wiley Blackwell, vol. 49(3), pages 319-333, September.
    8. Weisman, Dennis L & Kang, Jaesung, 2001. "Incentives for Discrimination when Upstream Monopolists Participate in Downstream Markets," Journal of Regulatory Economics, Springer, vol. 20(2), pages 125-139, September.
    9. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 191-211, Winter.
    10. Economides, Nicholas, 1998. "The incentive for non-price discrimination by an input monopolist," International Journal of Industrial Organization, Elsevier, vol. 16(3), pages 271-284, May.
    11. Spence, A Michael, 1977. "Nonprice Competition," American Economic Review, American Economic Association, vol. 67(1), pages 255-259, February.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Alessandro Avenali & Giorgio Matteucci & Pierfrancesco Reverberi, 2010. "How does vertical industry structure affect investment in infrastructure quality?," DIS Technical Reports 2010-08, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
    2. Avenali, Alessandro & Matteucci, Giorgio & Reverberi, Pierfrancesco, 2014. "Broadband investment and welfare under functional and ownership separation," Information Economics and Policy, Elsevier, vol. 28(C), pages 70-82.
    3. Dominik Schober, 2013. "Refinancing under Yardstick Regulation with Investment Cycles–The Case of Long-Lived Electricity Network Assets," EWL Working Papers 1321, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jun 2013.
    4. Christian Growitsch & Marcus Stronzik, 2014. "Ownership unbundling of natural gas transmission networks: empirical evidence," Journal of Regulatory Economics, Springer, vol. 46(2), pages 207-225, October.
    5. Andreas Haller & Christian Jaag & Urs Trinkner, 2013. "Termination charges in the international parcel market," Chapters,in: Reforming the Postal Sector in the Face of Electronic Competition, chapter 19, pages 277-293 Edward Elgar Publishing.
    6. Mark Armstrong & David E.M. Sappington, 2006. "Regulation, Competition and Liberalization," Journal of Economic Literature, American Economic Association, vol. 44(2), pages 325-366, June.
    7. Schober, Dominik & Weber, Christoph, 2015. "Refinancing under yardstick regulation with investment cycles: The case of long-lived electricity network assets," ZEW Discussion Papers 15-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    8. Growitsch, Christian & Stronzik, Marcus, 2011. "Ownership Unbundling of Gas Transmission Networks - Empirical Evidence," EWI Working Papers 2011-7, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    9. repec:eee:indorg:v:53:y:2017:i:c:p:114-144 is not listed on IDEAS
    10. Andreas Haller & Christian Jaag & Urs Trinkner, 2011. "Termination Charges in the International Parcel Market: Competition and Regulation," Working Papers 0028, Swiss Economics.
    11. Stefan Bühler & Simon Wey, 2010. "Demand-Enhancing Investment in Mixed Duopoly," University of St. Gallen Department of Economics working paper series 2010 2010-16, Department of Economics, University of St. Gallen.
    12. Sand, Jan Y., 2012. "Infrastructure quality regulation," Transport Policy, Elsevier, vol. 24(C), pages 310-319.
    13. Gugler, Klaus & Rammerstorfer, Margarethe & Schmitt, Stephan, 2013. "Ownership unbundling and investment in electricity markets — A cross country study," Energy Economics, Elsevier, vol. 40(C), pages 702-713.
    14. Yongmin Chen & David E. M. Sappington, 2010. "INNOVATION IN VERTICALLY RELATED MARKETS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(2), pages 373-401, June.

    More about this item

    Keywords

    infrastructure quality; deregulation; investment incentives; access charges; regulation;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation

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