Strategic Bypass Deterrence

Posted by D. Daniel Sokol

Francis Bloch (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) and Axel Gautier (HEC-University of Liege - Department of Economics analyze Strategic Bypass Deterrence.

ASBTRACT: In liberalized network industries, entrants can either compete for service using the existing infrastructure (access) or deploy their own infrastructure capacity (bypass). In this paper, we demonstrate that, under the threat of bypass, the access price set by an unregulated and vertically integrated incumbent is compatible with productive efficiency. This means that the entrant bypasses the existing infrastructure only if it can produces the network input more efficiently. We show that the incumbent lowers the access price compared to the ex-post efficient level to strategically deter ineffi cient bypass by the entrant. Accordingly, from a productive effi ciency point of view, there is no need to regulate access prices when the entrant has the option to bypass. Despite that, we show that restricting the possibilities of access might be profi table for consumers and welfare because competition is fiercer under bypass.