Quality upgrades and bypass under mandatory access |
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Authors: | João Vareda |
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Institution: | 1.Autoridade da Concorrência,Lisbon,Portugal;2.Instituto Superior Técnico,Instituto de Sistemas e Robótica,Lisbon,Portugal |
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Abstract: | We analyze the interaction between the incumbent’s incentive to upgrade the quality of its network and the entrant’s incentive
to build a bypass network when the regulator sets a two-part access tariff to the incumbent’s network. Under this context,
the entrant’s investment in a bypass network is delayed with a higher incumbent’s investment in quality. Moreover, the possibility
of investment in a bypass network by the entrant has a positive effect on the incumbent’s incentive to upgrade quality. We
show that a regulator cannot achieve the first best with a constant access tariff. If he wants to design an alternative welfare
improving access tariff, he should set an access fee increasing (decreasing) in quality if the business-stealing effect of
quality upgrades is weak (strong). The analysis suggests that if the entrant’s investment costs are declining or its market
share is increasing over time, it is not always optimal to require the incumbent to lease facilities at cost-based prices. |
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