Full vs. Light-Handed Regulation of a Network Industry

Joyce Sadka. Jose Luis Negrin

No 257, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: The access pricing problem emerges when a vertically integrated firm (the incumbent) provides an essential service in the upstream market, to an entrant. Both firms produce a final service and compete in the downstream market. The standard treatment of this problem has been to add the access price to the list of instruments available to a regulator who maximizes a social welfare function. Motivated by the international trend to reduce the number of prices set by regulation, we use a light handed regulation approach in which the only tool available to the regulator is the access price, and where retail prices are set by quantity competition in the downstream market. In this setup, we find that a regulator seeking to maximize total market surplus will set an access price that subsidizes the entrant, so that entrants that are less efficient than the incumbent firm can survive in the market. We then compare the outcomes of the full regulation model with those of the light-handed regulation model, in terms of final prices, firm profits, and consumer surplus. When the regulator faces incomplete information about entrant firms' costs and cannot offer a menu of contracts to potential entrants, we find examples in which light handed regulation can dominate full regulation

Keywords: Regulation; essential input; access pricing; vertical integration; regulatory discretion (search for similar items in EconPapers)
JEL-codes: K23 L22 L51 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://repec.org/esLATM04/up.19980.1082065899.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecm:latm04:257

Access Statistics for this paper

More papers in Econometric Society 2004 Latin American Meetings from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().