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Deregulating Network Industries: Dealing with Price-Quality Tradeoffs

  • Stefan Buehler

    ()

    (Socioeconomic Institute, University of Zurich)

  • Dennis Gaertner

    ()

    (Socioeconomic Institute, University of Zurich)

  • Daniel Halbheer

    ()

    (Socioeconomic Institute, University of Zurich)

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.

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File URL: http://www.soi.uzh.ch/research/wp/2004/wp0402.pdf
File Function: Revised version, 2005
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Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0402.

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Length: 27 pages
Date of creation: Jan 2004
Date of revision: Oct 2005
Publication status: Published in Journal of Regulatory Economics 30(1), 99-115, 2006
Handle: RePEc:soz:wpaper:0402
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  1. Spence, A Michael, 1977. "Nonprice Competition," American Economic Review, American Economic Association, vol. 67(1), pages 255-59, February.
  2. Benz, Men-Andri & Bühler, Stefan & Schmutzler, Armin, 2003. "Infrastructure Quality in Deregulated Industries: Is there an Underinvestment Problem?," CEPR Discussion Papers 3836, C.E.P.R. Discussion Papers.
  3. David Mandy & David Sappington, 2007. "Incentives for sabotage in vertically related industries," Journal of Regulatory Economics, Springer, vol. 31(3), pages 235-260, June.
  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. Newbery, D., 1996. "Privatisation and Liberalisation of Network Utilities," Cambridge Working Papers in Economics 9620, Faculty of Economics, University of Cambridge.
  6. 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 157-72, March.
  7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  8. 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 319-33, September.
  9. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
  10. 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 125-39, September.
  11. 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.
  12. 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.
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