Efficient Access Pricing and Endogenous Market Structure

Abstract

We analyze a model of regulated competition in differentiated retail goods and services between an incumbent firm, who owns a network good (an essential input) and a potential entrant, whose cost of production is private information. The regulator sets the retail prices and the access charge that the entrant pays to the incumbent. The decision of the (potential) competitor to enter the retail market crucially depends on the regulatory mechanism, and consequently the market structure is endogenous. We analyze the efficient mechanism that gives rise to a set of “modified” Ramsey prices. We derive a cut-off level of entrant’s marginal cost below which the induced market is a duopoly. We show that, under a linear demand system, there is inefficient entry compared to the social optimum.