Optimal Access Price Research Articles

Retailer access pricing and supplier relations in the agency model

AbstractIn vertical relations where a retailer enters into agency contracts with multiple heterogenous suppliers of unrelated products, I show the retailer can turn the products into complements or substitutes by charging or subsidizing consumers for access. The optimal access price depends critically on the revenue share that the retailer takes from each supplier, and the retailer's cross‐price elasticity with respect to each supplier's price. When firms price simultaneously, the retailer optimally subsidizes consumer access if and only if the aggregate of these two factors across all suppliers exceeds 1. When the retailer prices before suppliers, it benefits from an additional demand amplification effect: The retailer can use the access price to manipulate suppliers' best responses such that they always lead to demand surges across the whole network of suppliers, which then benefits the retailer through revenue sharing. Under different circumstances, the retailer may achieve this through either further raising a positive access price, or further reducing a negative access price.

Pricing to preclude sabotage in regulated industries

We characterize the optimal access price and retail price for a vertically-integrated incumbent supplier (V) that faces limited competition from a new entrant in the retail sector. The optimal prices provide V with a relatively high wholesale profit margin and a relatively low retail profit margin. Consequently, V has no incentive to raise the costs of its retail rival.

Access regulation and the entrant's mode of entry under multi-product competition in telecoms

We study the optimal access regulation during the transition from copper to fiber access networks in telecoms when each competitor provides broadband services that are both horizontally and vertically differentiated. We consider a setting in which there is a vertically integrated incumbent that controls a network required for the supply of the final services and an entrant that undertakes a “build-or-buy” decision. In this multi-product framework, where the quality of the services is endogenously determined, we show that the entrant always prefers service-based to facilities-based entry, provided that this option is available. Hence, the regulator sets the welfare-maximizing access charges whenever this socially optimal access pricing policy leads to higher welfare than facilities-based entry. Otherwise, a sufficient access policy that ensures facilities-based competition is to ban access to the incumbent's upstream facilities. We present the conditions under which each of these instruments should be implemented and conclude that the optimal access rules depend on the characterization of consumers according to their tendency to be “firm-oriented” or “technology-oriented” since this discrimination determines whether intra-firm or, respectively, inter-firm competition prevails in the market.

Access pricing, infrastructure investment and intermodal competition

This paper considers the existence of a given transport infrastructure and analyzes the optimal conditions for investing in a complementary or rival new infrastructure. The model allows us to identify some key variables to be considered in cost–benefit analysis and highlights the importance of socially optimal access pricing in relation to investment decisions. The socially optimal conditions for investment depend on, among others, the cross-effects between different modes of transport, the volume of demand, the construction cost of the new infrastructure, and the restrictions faced by the regulator.

Level of access and infrastructure investment in network industries

In this paper, we study how the terms of access to an incumbent’s infrastructure (i.e., the level of access and price) affect an entrant’s incentives to build its own infrastructure. Setting a high level of access (e.g., a resale arrangement), which requires relatively small up-front investment for entry, accelerates market entry, but at the same time delays the deployment of the entrant’s infrastructure. This is also true for a lower access price. We show that the socially optimal access price can vary non-monotonically with the level of access. We also study the case where access is provided at two different levels, and show that access provision at multiple levels can delay infrastructure building. Finally, we modify our baseline model to allow for experience and/or market share acquisition via access-based entry, and show that high levels of access may accelerate facility-based entry.

Infrastructure investment and optimal access regulation in the different stages of telecommunications market liberalization

In this paper, we compare the optimal access regulation under three different market configurations that approximate the different stages of telecommunications market liberalization. We show that in the first stage of market liberalization the regulator has to balance between static efficiency and investment and that the optimal access price may be above marginal cost. In the second stage, two different outcomes are possible. If entrants tend to underinvest, the regulator balances between static efficiency and investment. If entrants tend to overinvest, the regulator sets the access price as low as possible in order to prevent or limit infrastructure duplication. Interestingly, we find that in the third stage of market liberalization the regulator may decide to promote infrastructure duplication and to set the access price above the price in the first stage of market liberalization, even if telecommunications network operators tend to overinvest in infrastructure duplication.

Optimal access regulation with downstream competition

We analyze the setting of access prices for a bottleneck facility where the facility owner also competes in the deregulated downstream market. We consider a continuum of market structures from Cournot to Bertrand. These market structures are fully characterized by a single parameter representing the intensity of competition. We first show how the efficient component pricing rule should be modified as the downstream competitive intensity changes. We then analyse the optimal access price where a regulator trades off production efficiency and pro-competitive effects to maximize total surplus.

Level of Access and Infrastructure Investment in Network Industries

In this paper we study the effect of the terms of access to an incumbent's infrastructure on an entrant's incentives to build its own infrastructure. Setting a high level of access (e.g., a resale arrangement), which requires relatively small up-front investment for entry, accelerates market entry, but at the same time delays the deployment of the entrant's infrastructure. This is also true for a lower access price set for a given access level. We show that the socially optimal access price can vary non-monotonically with the level of access. We also consider two levels of access, and show that providing the entrant with multiple levels of access delays infrastructure building.

On the social optimality of make-or-buy decisions

This article examines the impact of input prices on an entrant’s make-or-buy decision and on the subsequent social welfare level for three alternative models of downstream competition. For each particular model, it derives the range of input prices that induce the entrant to undertake: (a) the productively efficient make-or-buy decision; and (b) the socially optimal make-or-buy decision. The main conclusion of this article is that the entrant’s efficient make-or-buy decision is always socially optimal in the case of the Hotelling model, is socially optimal for the set of input prices that induce the entrant to undertake the efficient decision in the case of Cournot competition and is not necessarily socially optimal in the Bertrand vertical differentiation model. Last, this article examines the conditions under which the efficient and/or socially optimal make-or-buy decision undertaken by an entrant fulfills the regulatory two-fold goal of promoting service-based competition and encouraging facilities-based competition. Therefore, this article also provides the optimal access pricing policy that results in the best feasible outcome in terms of social welfare, productive efficiency, competition level and investment level for a given downstream competition model.

Optimal access pricing for natural monopoly networks when costs are sunk and revenues are uncertain

This paper studies optimal access pricing for natural monopoly networks with large sunk costs and uncertain revenues. Using techniques from the option pricing literature, we show that the optimal access price corresponds to a risk-free form of the Efficiency Component Pricing Rule (ECPR), that is, where the opportunity cost is based on the risk free rate of return. We also show that at levels of revenue above the optimal level that triggers entry, the entrant should pay a premium above risk-free ECPR that rewards the incumbent for relinquishing his rights to the risky cash flows at the higher revenue level.

The Optimal Access Price in a Vertically Related Industry

An important component of the National Competition Policy is the regulation of access prices for major infrastructure facilities. The primary goal of regulation is to protect rival firms from anti-competitive measures of the owners of such facilities. It is commonly held that the regulation of access price does not necessarily benefit the non-integrated downstream rivals, since the access price may act as a collusive device to restrict output in the downstream market that will enhance profits accruing to all competitors. We contest this important finding: we develop a sequential game to examine an industry characterised by naturally monopolistic and potentially competitive activities that are vertically related. We establish that in the perfect Nash equilibrium of the proposed game the integrated firm has an incentive and an ability to use the access price in the upstream market to leverage into a position of power in the downstream market to the detriment of its rivals. It is hence essential to regulate access prices in such markets to protect non-integrated rivals and to promote competition.

THE REVENUE-SHARING RULE FOR INTERCONNECTION CHARGES*

In this paper we explore the economic principle behind the revenue-sharing rule for interconnection charges. Our main finding is that symmetric firms can collude by splitting the revenues equally. We further characterize the optimal revenue-sharing ratio and discuss the relationship between optimal ratio and the optimal access price. We also show that the revenue-sharing rule can have the perverse effect of inducing a firm to raise its own costs in order to gain a higher share of revenues.

Distribution access pricing: application of the OFTEL rule to a yardstick competition scheme

The paper formulates an access-pricing model applied to electricity distribution, based on the UK Office of Telecommunications (OFTEL) model, originally structured to price telecommunications monopolistic-essential facilities. The aim is to achieve an optimal access price charge, in an environment where a distribution network monopoly serves both regulated and nonregulated customers. The nonregulated market faces competition, so that the competitors must use the network to reach their customers. A usage-based hybrid model is proposed to couple with a tariff scheme for regulated customers that uses yardstick competition. A way to set appropriated opportunity costs by the use of the OFTEL model is introduced. Finally, the paper focuses on properly recognizing both regulated distribution and competitive supply costs. The scheme is assessed within the Chilean regulatory scheme, proposing a way to establish marginal and fixed distribution costs for distribution companies.

Distribution Access Pricing: Application of the OFTEL Rule to a Yardstick Competition Scheme

The paper formulates an access-pricing model applied to electricity distribution, based on the UK Office of Telecommunications (OFTEL) model, originally structured to price telecommunications monopolistic-essential facilities. The aim is to achieve an optimal access price charge, in an environment where a distribution network monopoly serves both regulated and nonregulated customers. The nonregulated market faces competition, so that the competitors must use the network to reach their customers. A usage-based hybrid model is proposed to couple with a tariff scheme for regulated customers that uses yardstick competition. A way to set appropriated opportunity costs by the use of the OFTEL model is introduced. Finally, the paper focuses on properly recognizing both regulated distribution and competitive supply costs. The scheme is assessed within the Chilean regulatory scheme, proposing a way to establish marginal and fixed distribution costs for distribution companies.

Optimal access pricing with interconnection obligation

In view of the recent regulatory trend that the incumbent is mandated to provide its own bottleneck facilities to entrants when requested, it is more reasonable to take an entrant than the incumbent as the one who plays a leader role. Given this regulatory framework, the present paper examines under what conditions the ECPR or marginal cost pricing is socially optimal.

The Access Pricing Problem with Deregulation: A Note

This note extends the analysis of Armstrong, Doyle and Vickers [1996] to the case of retail price deregulation. It is shown (i) that the optimal access price may be above, below, or (in the linear case) equal to marginal cost, (ii) that optimal regulation of the margin between the retail price and the access price entails the ECPR, and (iii) that welfare and entrant profit are higher when the level of the access price, rather than the margin, is regulated.

Non-discriminatory access pricing for multiple entrants

Competing with a vertically integrated incumbent that monopolizes a vital input typically requires access to the input for the supply of final services. The possibility of anti-competitive behavior makes the pricing of access one of the most important issues in the network industries. The existence of multiple entrants seeking access creates a yet another requirement of non-discriminatory to regulatory agencies who in general cannot make discrimination between one entrant and another. The present paper aims to analyze how this non-discriminatory requirement can be dealt with in deriving the optimal access pricing rules in relation to the ECPR formulas.

Access Pricing under Rate‐of‐Return Regulation

Third‐party access to major infrastructure facilities is a key component of National Competition Policy. In many situations, both through state regimes and access undertakings under the new part IIIA of the Trade Practices Act, access will be governed by explicit or implicit rate‐of‐return procedures. Infrastructure assets will be valued and translated into an allowable return for the owners. However, setting allowed returns is only the first part of the regulatory process. This paper uses a simple model to evaluate the ‘second‐best’ access prices under rate‐of‐return regulation. We show that optimal access prices will depend on the degree of downstream competition. With imperfect price competition and fixed numbers of firms downstream, optimal access prices will ‘mimic’ downstream competition and reduce downstream profits. With free entry downstream, optimal access pricing should determine an optimal level of downstream participation. We also show that the access provider’s incentives to introduce optimal access prices will depend on the degree of vertical integration.