The Effect of Vertically Differentiated Entry Under Retail-Minus Access Pricing

Byun Jeong Wook () and Sung-Hwan Kim
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Byun Jeong Wook: Korea Information Society Development Institute (KISDI), Jincheon, South Korea

The B.E. Journal of Economic Analysis & Policy, 2015, vol. 15, issue 2, 747-767

Abstract: We examine the effect of vertically differentiated entry under retail-minus access pricing. Unlike the existing studies, we show that retail-minus regulation could obtain the intended result of reducing the retail price. This concurs to a great extent with conventional wisdom, which has been criticized, but not entirely, because the price-reducing effect in our model is not driven by competition. Such an effect is more obvious in the case of inferior-quality entry, where the lower incumbent price can help the entrant expand the market. The key is that the retail-minus rule offers the incumbent an incentive to reduce its price in order to utilize the value created by the entrant. The outcome relies on the combination of a differentiated entry and the retail-minus rule. Differentiated entry under the retail-minus rule could benefit both the incumbent and consumers because the rule protects the incumbent from business stealing while allowing value creation by the entrant.

Keywords: retail-minus rule; access pricing; vertical differentiation (search for similar items in EconPapers)
JEL-codes: D21 D43 L13 L42 L51 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1515/bejeap-2014-0033

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