Tuesday, February 24, 2009
Posted by D. Daniel Sokol
Axel Gautier, University of Liege - Research Center on Public and Population Economics, Catholic University of Louvain - Center for Operations Research and Econometrics (CORE) and Manipushpak Mitra, University of Bonn - Institute of Economic Theory write on Regulation of an Open Access Essential Facility.
ABSTRACT: A vertically integrated firm owns an essential input and operates on the downstream market. There is a potential entrant in the downstream market. Both firms use the same essential input. The regulator's objectives are (i) to ensure financing of the essential input; and (ii) to generate competition in the downstream market. The regulatory mechanism grants non-discriminatory access of the essential facility to the entrant provided it pays a two-part tariff to the incumbent. The optimal mechanism generates inefficient entry. The inefficient entry captures the trade-off between market efficiency and infrastructure financing resulting from incomplete information and non-discriminatory access.