Access pricing and competition

Abstract

In many industries (electricity, telecommunications, railways), the network can be described as a natural monopoly. A central issue is how to combine the necessary regulation of the network with the organization of competition in activities which use the network as an input and are potentially competitive (generation of electricity, value added services, road transportation). In this paper we derive access pricing formulas in the framework of an optimal regulation under incomplete information. First, we study how access pricing formulas take into account the fixed costs of the network and the incentive constraints of the natural monopoly over the network. Second, we examine the difficulties coming from the accounting impossibility to disentangle costs of the network and costs of the monopoly's competitive goods. Third, the analysis is extended to the cases where governmental transfers are prohibited, where the competitors have market power, and where competitors are not regulated. Fourth, the possibility some consumers bypass the network is taken into account. Finally the role of access pricing for inducing the best market structure is assessed. The conclusion summarizes our results and suggests avenues of further research.