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DEWEY
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Cewey
working paper
department
of economics
ACCESS PRICING AND COMPETITION
Jean-Jacques Laffont
Jean Tirole
95-11
July, 1994
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139
ACCESS PRICING AND COMPETITION
Jean-Jacques Laffont
Jean Tirole
95-11
July, 1994
MASSAC HUSE.7 z, MSTiTLi
OF TECHNOLOGY
1
MR
2 9 1995
LIBRARIES
<"!
95-11
Access Pricing and Competition*
Jean- Jacques LaiFont^and Jean Tirole*
July
*We thank
^Institut
Jerry
6,
Hausman and John Vickers
Universitaire de France,
and
1994
comments.
d'Economie Industrielle, Toulouse,
for helpful
Institut
France
*Institut
bridge,
d'Economie
MA USA
Industrielle, Toulouse, France;
CERAS,
Paris;
and MIT, Cam-
°t
5--//
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.
how
First,
we study
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 ac-
counting 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.
is
Fourth, the possibility some consumers bypass the network
taken into account. Finally the role of access pricing for inducing
the best market structure
results
is
assessed.
The
conclusion summarizes our
and suggests avenues of further research.
Introduction
1
many
In
industries (electricity, telecommunications, railways), the network can be de-
scribed as a natural monopoly.
However,
many
activities
which use the network
as
an
input are potentially competitive (generation of electricity, value added services, road
A
transportation).
central issue
is
how
to
work with the organization of competition
Two
different types of policies
combine the necessary regulation of the netin those activities.
can be observed. In the USA, the local network mo-
nopolies in the telephone industry have been prevented from entering the value added
markets as well as the long distance market because of the Department of Justice's belief
that
in
it
is
impossible to define access rules to the network which create
those markets
4
.
The argument
here
is
that
the network to provide unfair advantages to
it is
its
R&D subsidies...)
superior quality of access,
cost auditing. In the language of
competition
too easy for the monopoly in charge of
own products
even
if
(favorable access charges,
subsidiaries are created to improve
modern regulatory economics, asymmetries
between the regulator and the monopoly are so large that
tion
fair
of informa-
competition
fair
is
not
possible.
The
alternative policy of defining access charges
common. The long
also
(BT)
to reach
market.
The
and
letting the
regulatory choice of the access charges
regulatory review of 1991,
its
European Community
BT
is
BT in the long distance
complex.
For instance, in the
has argued that the current setting of access charges creates
competitor (Cave (1992)). Note also that
it
is
the goal of the
to define "reasonable" access charges to organize the competition
of electricity generation in Europe.
Other examples of
computer reservation systems and gas
It is difficult
activities
with regulated access are
pipelines.
to appraise the difficulties of regulating access
if all
the imperfections of
regulatory processes are taken into account simultaneously. In this paper,
we
start
an optimal benevolent regulation of a network monopoly facing a competive fringe
potentially competitive markets
focus
incorporated into our modeling.
a
first
of a
The modeling
step,
we choose
of the costs
to focus
more general theory
in
from
in the
and we successively introduce various imperfections. To
on access we neglect the relevant
policy.
is
distance operator Mercury pays access charges to British Telecom
consumers through the local loops and compete with
unfair advantages for
monopoly compete
issue of
network externalities, which could be easily
Perhaps more importantly, we ignore the divestiture
and benefits
on the
of vertical integration
is
complex, and, in
vertically integrated structure as a building block
which breakups might be desirable.
'"'DO J... Jid not believe that judicial and regulatory rules could be effective in preventing a monopolist
affiliate that provided competitive products and services" Noll (1989).
from advantaging an
The
existing theoretical literature on network access pricing includes
two papers
build-
on contestable markets theory. Willig (1979) studies interconnection by competing
ing
He
suppliers.
may
stresses the fact that strategic behavior
deter socially beneficial entry (for example to expand
regulation)
and analyses the extent
to
its
lead the network operator to
rate base under rate of return
which Ramsey pricing
market structure. Baumol (1983) discusses similar
compatible with the best
is
issues in the
framework of railroad
ac-
cess pricing. Vickers (1989) addresses the access pricing issue within the Baron- Myerson
model
of regulation under incomplete information.
monopoly (network
integrated
sector of services with
commodity
in particular a vertically
plus services) with the case of an imperfectly competitive
and without participation
Section 2 describes the model.
olized
He compares
A
of the network operator.
monopoly operates a network.
(for concreteness, local telephone), as well
It
produces a monop-
another commodity (long
distance telephone) which faces a competitively produced imperfect substitute.
The
long
distance operators require access to the local network in order to reach the final consumers.
That
the potentially competitive market needs to use the monopolized
is,
The purpose
an input.
access.
We
start
of the paper
is
commodity
normative theory of how to price
to develop a
by postulating that the regulator has complete information and faces a
social cost for public funds associated with the deadweight loss of taxation.
price
must then exceed marginal
deficit. Equivalently, access
for a further
any,
is
meant
The
access
cost in order to contribute to the reduction of the overall
can be priced at marginal cost and a tax levied on access. Sec-
tion 3 studies the impact of the regulator's incomplete information
cost structure
as
on the monopoly's informational
about the monopoly's
Incomplete information
rents.
departure from marginal cost pricing of access.
The
may
call
further distortion,
to reduce the monopoly's rent. Section 4 explores conditions
if
under which
the observability of the monopoly's subcosts, namely the cost related to the monopolized
good and the
The
analysis
ceive any
its
cost related to the competitive
is
extended
good
respectively, improves social welfare.
in Section 5 to the case
where the monopoly does not
monetary transfer from the regulator and therefore must cover
revenue.
The
access charge
is
cost with
then higher or lower than in the absence of a firm-level
budget constraint, depending on whether the monopoly's fixed cost
6 generalizes our access pricing formula to the case in
is
its
re-
is
high or low. Section
which the substitute commodity
produced by a competitor with market power rather than by a competitive industry
and Section
7 considers the case in
competitive segment at
all
which the regulator has no mandate to regulate the
(including the production of the competitive good by the
monopoly.)
Sections 6 and 7 emphasize the complexity of regulating a competitive segment with
limited instruments.
when consumers
Limitations on regulatory instruments are particularly penalizing
of the competitive
commodity can bypass the use
of the monopolized
good
(local telephone).
The determination
of the access price
conflicting goals of limiting inefficient bypass
it
and
must then trade
off
the
of contributing to budget balance (be
the State's or the firm's). Unless the regulator
is
able to simultaneously tax the long
distance market to raise funds to cover the firm's fixed cost and use the access charge to
approximate the
efficient level of
bypass, only a rough balance between these objectives
can be achieved. The separation of the regulatory function from the taxation authorities
creates serious difficulties in the presence of bypass (Section 8).
Section 9 links the determination of the access charge with the choice of a market
structure and with the promotion of entry in the competitive segment.
ponent pricing rule recently advocated by some economists
is
The
efficient
com-
assessed in the light of our
normative treatment. Section 10 compares the theoretical precepts with two regulatory
practices,
namely the
British Telecom.
fully allocated cost
method and the Oftel
The Conclusion provides a
summary
brief
access pricing rule for
of our analysis
and discusses
avenues of further research.
The Model
2
A monopoly
operates a network with cost function
Co
Q
where
of
co,
Q)
Co0 >
,
effort
is
F(.) on [3,
J3]
C0eo <
,
with a
strictly positive density function /.
0]).
With the network the firm produces a quantity
q
of a
let
(1)
private information of the firm
is
>
telephone).
0,
exerted by the firm in operating the network.
rate assumption {jg[F(3)/ f(3)]
monotone hazard
Coq >
,
a parameter of productivity, and eo a level
a parameter of adverse selection which
c.d.f.
and
(/3,
the level of network activity, 3
nonmonetary
,3 is
a
is
=C
:
Let us assume that q
units of this
also a
good
1
the classical
monopolized commodity
commodity require
S(qo) be consumers' utility for this good, with S'
The monopoly produces
We make
3 has
;
>
0,
S" <
q
(local
units of network
0.
(long distance telephone) in quantity q x
.
This
other production has an imperfect substitute produced in quantity q2 by a competitive
fringe. Let V' ( <?i ^2 )
,
be consumers'
utility for these
two commodities.
In addition to the network input the production of
C\
where
t\
is
=
good
1
also generates a cost
Ci{3,e x ,qi)
the effort exerted to reduce the cost of producing
(2)
good
1.
The
disutility of
effort
is
+
v{e
ex
with
)
y>'
>
0,
0" >
>
y'"
and
0.
good 2 generates a
In addition to the network input the production of
c
is
common
knowledge. Because we wish to focus on the network monopoly's incentive
we need not
to provide access,
Total network activity
investigate incentive issues in the fringe.
Q=
therefore
is
qo
+ qi + q2
FT
Under complete information, the
effort levels.
lator.
We make
Let
t
=
-
p 2 q2
Let a denote the access unit charge
.
The
paid by the competitive fringe to the monopoly.
and
-
cq2
fringe's level of profit
aq2
is
then
(3)
.
utilitarian regulator observes prices, quantities, costs,
denote the net transfer received by the monopoly from the regu-
from the
sale of the competitive
good and network good
to the con-
sumers, and that the firm receives the access charges. This obviously involves no
The monopoly's
utility level
U = tThe
1
+
regulator must raise
A (where A
S(q
)
>
+ V(q
t
)
+
is
then
+
ip(e
+ C + Ci — p
ex
)
+
— piqi
q
x
.q 2 )
-
p
<?o
~
Pl?l
V(qi,q 2 )
+
[t
p qQ
-
-
ii>(e
~ P2<?2 -
aq2
(4)
.
with a shadow price of public funds
+
(1
'M(*
utilitarian regulator
piqi
- p 2 q2 -
loss of
:
because of distortive taxation). The consumers'/taxpayers'
Under complete information an
S(q
:
the accounting convention that the regulator reimburses costs, receives
directly the revenue
generality.
where
cost cq 2
(1
+ e + aq2 +
t)
+
A)(f
p 2 q2
+ CQ + C - p
X
q
-
utility
piqi).
is
(5)
would maximise
+ C + C\ - p
-
cq2
-
q
- piqi)
aq2
(6)
under the individual rationality (IR) constraints of the monopoly and the fringe
U = -0(e o +
t
EI
= p 2 q2 —
ei)
cq 2
—
+
aq 2
aq 2
>
>0
(7)
0.
I
Since public funds are costly, the monopoly's IR constraint
can be rewritten
is
$
binding and social welfare
S(q
-
+
(1
Similarly, raising
4-
)
V(ft, ft)
+
A) (V(e
ci)
constraint
+C
money through
the term Xaq2 in social welfare).
+
+
Apxft
(/3, co,
?o
+ ft + ft) +
(9), social
S(q
-
+
(1
A) (V(e
Assuming that 5 and
The
access charge
is
)
+
V
+
ex)
=
+
V(ft, ft)
+C
(P, e
are concave
valuable (see
(10)
,
A(p
ft
+ Pift + P2ft)
<7o
+
+
ft
Ci(j3,
and Co and C\ convex
^^
1
A
=
?t
2
optimal
we can write
(12)
+
j_
A ft
1
+
A
(14)
772
are (respectively) the price superelasticities of goods 0, 1,2, and
v'(e
+
ex)
= -C0eo = -Clei
Straightforward computations show that
f/
=
770
(ftft~ft2ftl)
ft=ft
772
=
pi
Opi
</,-
.
(15)
and
^
<
ft
\
nfi
lb
l
^
<
772
n-i
111)
)
ftft2
(ftft~7i2fti)
772
;
ft ft
t
+
.
;
ftft
= — —0q
in (eo, ex, ft, Q),
(11)
11.
m
P2
rj
cq2 )
7/o
1
n-G»-c
u ft) +
r±rl
+A
=
= Pi-C g-Cx
Lim
ft,
+
ft)
Pi
77,-
is
(9)
chosen to saturate the fringe's IR
is
characterized by the first-order conditions, that
£i
,
Ci, ft)).
p2 -c.
Po
where
Ci(0,
welfare takes the final form
U=
770,
cq2
:
Substituting (10) in
where
-
Aag2
the access charge from the fringe
a
regulation
+
ft
Ap
+
ftftl
=
7.-i
i*'
jt-
The benchmark
J
'
=
1
'
2
=
z
1
<
2
-
-
pricing rules are
Ramsey
pricing rules because A
>
0.
The
access
charge can be rewritten
1
Access
°2
(1
2
is
7/ 2
priced above marginal cost because deficits are socially costly.
low or when the social cost of funds
issues raised by
If
(18)
A
can be viewed as a tax used to raise money.
-
,
,
is
+
is
high
It is
when
the elasticity of good
high. In the next section
we address
various
asymmetric information.
the regulator has two instruments, the access price and a tax on good
(14) can
The term
be rewritten a
+
marginal cost of access.
r2
=
Cqq
+ y+x^
Furthermore,
it
is
2,
r2 equation
,
an d a can obviously be taken equal to the
clear that
if
the regulator had access to a
nondistortive (lump sum) tax, marginal cost pricing of commodities and access would be
optimal.
Access Pricing and Incentives
3
The
first
pricing.
issue
we consider
is
the extent to which asymmetric information affects access
Let us consider the case where accounting rules enable the regulator to observe
separately Co and C\.
Let Eo((3,Co,Q) denote the solution in
the solution in
e\
of
C =
x
t
Ci(0,ei,q{).
e
The
of
=
Co
Co{{3,eo,Q) and
firm's utility
+ aq2 -ij,(Eo(P,Co,Q) + E
1
let
Ei(j3,C\,qi)
can be written
(19)
(l3,Cl ,ql j).
Appealing to the revelation principle we consider a revelation mechanism
{*(£),
which
C
(/3),
CM,
qi 0), q2 0),
specifies the transfer received, the sub-costs to
produced, and the access price to be received
if
Q0), a(0)}
(20)
be realized, the quantities to be
the firm announces a characteristic
Neglecting momentarily second-order conditions, and using the rent variable
U(j)
=
t(,3)
+ a(/3)q2 (<3)-T!>(EQ (0,
CM,
Q(0))
+ Ei(0,
CM,
?i (/?))),
j3.
monopoly can be written
the incentive constraint of the
^=-^^Hw + w)-
c
Since
-^ >
^- >
and
>
(IR) constraint {U(3)
0,
the rent
for all
down
boils
/?)
decreasing in
is
U{0)
Optimal regulation
+\[po(0)to(po{fi))
-(1
+
A) {v(e
+
(j3)
>
0.
(22)
+ V( qi (pM,P2(P)),
(/?, e Q ((3),
rationality
to
+ M0)qi(pM,P2(P))
+C
ei (0))
and the individual
from the maximization, subject to (21) and
results
{s(qo(po(P)))
\l
/?
(21)
fc(po (0))
(22), of
fc(Pt(fl, P»{0)))
+P2{P)9i(pi{P),Pi(fi))]
+ qMPlPiifl)) + toMfiMP)))
+ C (^eMMPi(0),P2(0)))+cq2iPi(0),P2m)]-XU(0)}dF(0).
t
We
obtain (see appendix
Po
Pi
~
A
"
Cqq
l
—
+
C\ qi
Xf,
l
p2
+
1
A
£
tf7_0_f
+A
/
Pl
+
1
A
_
F
A
1
?\
T
(23)
1).
- C0Q
Po
:
f
A / Po
dQ\
-Co Q -c = _A_
i + A
p2
A
\
[
,Q)/
j?i
_J_ F
1_
"
fj
,Q)
i
C03 (/3,eo,Q) \
C0eo (^eo,g)J
Ugl
C03 (P,e
C0eo (/?,e
d
y/
i
2
+
A
d
<9?i
ry_5_
/ p2
f
I
f
agl
Clg (y3, ei gl n
CUl {P,euqi)}J
)
,
_ Cofl (/?,e ,g)
)
c0eo (/?,eo,g)/'
All prices are modified by an incentive correction related to the sub-cost function Co
and
pi has
The
an additional correction associated with C\.
now be written
can
access charje
3
'
J
=c
A
p2
is
F
,
v
d
f
C'OB
(
^^TTA^ rTA7 ^i" c^r
Let us analyse the new term, which
that there
A
+
no correction
for the
is
most
(
'
due to incentive constraints.
efficient
type as F((3)
=
0.
First,
we observe
Second,
-jf-
=
— Co/j/Co eo
same
the
to
is
the rate at which the firm must substitute effort and productivity to keep
level of cost for the
determine the firm's
network ar "ivity. From
The
rent.
conversely
The
if it is negative.
we
see that
it is
a crucial term
regulator wants to limit this costly rent.
and
positive, he raises the access price
is
(21),
If
-Sni^f)
therefore reduces quantities to extract rent
and
on the access charge thus depends on
effect of incentives
fine characteristics of the cost function.
Access charges must be increased (decreased) for incentive reasons
network
of the
C
is
—
>
Co0gCoe o
is
obtained
if
(<)
>
"Spence-Mirrlees"' condition on cost, Cqqq
clear positive sign
Intuitively, production
marginal cost. However,
effort increases the
about
lie
if,
as
is
more
ambiguous.
if
an increase
its
in the level of
Q
characteristics (in elasticity
the quantity elasticity of the marginal effect on cost of the productivity charac-
if
teristics
is
must be decreased (increased)
increases (decreases) the "ability" of the firm to
0.
and our previous assumptions, a
reasonable, effort decreases the marginal cost, the effect
terms,
the cost function
such that
t-OeoQCoQ
With the
if
j3 is
larger (smaller) than the quantity elasticity of the marginal effect
on cost
of
effort).
From
we know 5
Leontief's theorem
charge (and on good
1)
disappears
iff
Co
If
there
furthermore C\
is
is
separable in
in addition that
the incentive effect on the access
there exists a function £ such that
=C
(/?,
(£(/?,e ),Q).
ei)
(23)
on the one hand, and
no incentive distortion on any commodity
:
qi
on the other hand,
the dichotomy between pricing rules
(unaffected) and the cost reimbursement rules (see below) holds.
The
access pricing rule can then be rewritten
1
Note that
Pi
— Cqq —
is
T}2
la
7iJ
also possible to find conditions
conclusions for the incentive correction
(29)
A
C\ qx
Pi
It
+
:
on the
when
it
-aOQ
Pi
cost function that yield
exists.
nonambiguous
For instance, the following class of
cost functions leads to a well defined sign of the incentive correction in the access charge
3
From
Leontief's theorem we
know that
^-
independent of
(-Oe„
function £(.) such that (29) holds (see Laffont-Tirole (1990a)).
10
Q
is
:
equivalent to the existence of a
Co
If
d
>
b(d
Let us
<
now
6),
=
(3Q
the incentive correction
-
„c/->&
c
eQ
Q
positive (negative).
is
consider the effort levels (in the case of dichotomy) obtained by maximizing
under (21) and (22) with respect to
(23)
d
60
,
ei).
We
obtain
'/''(eo
+
ei)
= -C0eo
^'(eo
+
ei)
= -Clei
2\F
(iTwr
(e
ei)
(w + w) +
0,(eo
+
ei)
Wdc: Cui
Equations (30) and (31) can be interpreted as cost reimbursement
(31)
rules.
If
the con-
ditions underlying the irrelevance of subcost observability (see Section 4) hold, one can
obtain sufficient conditions for the optimal contract to be implementable through a single
menu
of linear sharing rules
share of the total cost which
is
t
= A — B(Cq +
C\) where
B =
From
(30), (31),
and
reimbursed.
the most efficient type receives from the regulator a
tract)
and equates
its disutility
lump sum
^'fc
F({3)
=
1
=
1
^'fc
we
0,
"
1S
t ^ie
see that
transfer (fixed price con-
of effort to the marginal cost reduction as under complete
information.
REMARKS
1. -
The most
relevant cost functions
seem
to
be such that higher production
higher effort levels and therefore induce higher rents.
for
marginal costs and therefore indirectly
call for a general
Incentive considerations raise
reduction of quantities. Access
prices are increased for the competitor but simultaneously the
high prices for
its
own product and
own
misrepresentation.
efficiency of its
this link
2.
is
-
If
is
products. Because access costs are the
the competitor's, the current model
The
levels call
may
monopoly
same
penalized by
is
for the
monopolist
understate the incentives
s
for
firm cannot claim simultaneously high access costs and high
own products
(see Laffont-Tirole (1993,
Chapter
5) for
an example where
suppressed).
the fringe
is
not regulated but
is
competitive, the same results obtain
;
P2
=
o.
—
c
then ensured by competition rather than by the existence of a shadow cost of pubiic
funds.
11
3.
Let us consider implementation of the optimal revelation
-
ing specification
C =
now
includes
t
qi
+q2
.32)
)
(33)
monopoly can be rewritten
objective function of the
i(fi)
+
){q
i/ 1 (/?-e 1 )<7i-
1
where
follow-
:
C = H (p-e
The
mechanism with the
-^20- HQ-
Co
l
(
the access charge.
H?(Z))
-
)
The second-order
(34)
condition of incentive compat-
ibility is
d[3{
and the revelation mechanism
r(
The
price
firm
now
is
free to
+ qi +
\q
°
equivalent to a nonlinear reward function
is
v f_&_)
Co
choose
and the quantity of good
its
An
cost,
(as well as
1
which determines
alternative implementation
Co, C\, production levels qo,
the conditional
demand
\
is
.
good
it is
TJ-\(C\
= D 2 (qi,
chooses.
example) which
service (good 1)
selects the level of
raises the cost for the
is
C\
=
=
all prices
leading to the
jQ + Co(p,e
+
a)
and substitute
in (36).
,Q)
It
decreasing in the access charge
i
(an
network, but decreases the cost of
-iqi +Ci{/3,e l ,q 1 ).
12
c
For this purpose consider
some unobservable action
:
Co
will affect the
can be advised to choose the
picks.
it
it
for
it
obtained by writing the transfer as a function of costs
easy to check that the transfer received by the firm
vestment
knows that
its rent.
function of good 2, q2
Suppose that the monopoly
(36)
among
indifferent
is
4. -
it
It
2).
and access charge a
qi
:
+iir i(£i))
access charge but
access price defined in formula (27) since
same weighted
\qiJ)
q2 J
inits
Under complete information the optimal investment
is
=
i
level,
which minimizes
total cost,
qi/Q. Under incomplete information, the moral hazard constraint on investment
dE
- .dE
l
is
x
Q+ dc; qi=0
dco
or
.^qi dEildCx
QdEo/dCo'
1
To decrease the
C
and C\, may use
(implying
exist
if
j^P-
^
who
rent of asymmetric information the regulator,
cost
reimbursement rules with different rates
j^-) and this
may
observes both
for sharing overruns
lead to a distortion of investment (which would not
the regulator were not observing separately sub-costs Co and C\ as in the next
section).
If
1
i
too low (too high), the access price
is
(favor
good
2)
and
may be viewed by
is
to foster
is
increased (decreased) in order to favor good
the firm as a nonrecognition of
its
On
low access charge
investment costs in the network.
indeed low to decrease those types of investment which
4
A
an increase (decrease) of investment.
may be
It
excessive.
Sub- Cost Observability
Section 3 derived the optimal regulation under the assumption that the regulator could
audit the costs of the regulated
monopoly
well
from the cost of the commodity produced
Using
Ck
instead of
e k in
(l
A
X)rp'
(1
+
+
A)/
XFr
+
cost of the network
in the competitive sector.
the optimization leading to (30)
+
=
enough to separate the
d{E
°
dEk
dCk
+ El)
00
W Hj'
and
"
=
'
(31),
we have
\
l
(37)
high-powered scheme on activity k corresponds to a case where the transfer received
by the firm
is
highly dependent on cost
Ck
,
i.e.
where
(
— §§*•)
is
Indeed
high.
if
^
is
high in absolute value, marginal cost reductions on activity k per unit of effort are small
and therefore the firm
is
already induced to exert a large effort on activity
for further reference that if the cross
If
terms
gC
^
vanish the terms
sub-costs are not observable, the firm minimizes
chooses {e k } or, equivalently
{Ck },
its effort for
so as to minimize T.I=q
13
(
— ff^)
k.
are equal.
any cost
Ek {/3,Ck ,Q k
)
Also, note
target.
subject to
C
It
-f
= C
C\
Q Q = Q,Q\ =
(with the convention
Hence, in the absence of sub-cost
qi).
observation the marginal effort levels to reduce sub-costs (— -Sf-) are equalized 6
Whether the regulator wants
in
to give differentiated incentives
on
different activities
the case of sub-cost observability hinges on the cross-partial derivatives
that this expression
absolute value proportional to
in
is
which the firm can substitute 3 and
determinant of the firm's rent.
no point
is
of effort to
minimize cost
+
=C
C\
solution to the system
in order to
|^ = -^
{
observability
is
useless if
This result
d
2
tells
Section 3) and
it is
at
the main
total effort Yi\=Q Ek(3, Ct,
= Ek (3,C,Qo,Q\),
and Co + C\ = C }.
for all (k,£)
we obtain
which
(see
appendix
2)
is
Qk)
the unique
:
:
the firm faces uniform incentives
ii)
measures the rate
has a unique solution e k
the firm faces higher incentives
i)
(note
reduce rents.
Solving for the optimal regulation
Under sub-cost
h
the level of cost or the level of effort does not affect this
assume that the minimization of
formally, let us
subject to Co
effort in activity k (see
-&
).
E
QC
in using sub-cost observability to try to affect the firm's allocation
rate, there
More
If
A
de
.
E k /dCk d3 =
on those
on
activities
and therefore sub-cost observability
all activities
K for all k
for which low costs reduce rents
and some constant K.
us that the incentive constraints of the firm are identical with or
2
without sub-cost observability when d Ek/dCkd3
=
=
constant for k
the optimal pricing rules and in particular the optimal access pricing
0, 1.
Consequently
unaffected in this
is
case by sub-cost unobservability.
A
characterization of the subclass of cost functions satisfying the sub-cost-irrelevance
property with
that
K
=
is
easily obtained.
=
for
A:
=
0Ck d3
some functions
On
H
k
and
0,1
<*
ek
the subcost functions must be such
= Ek {3,Ck ,Q k = Hk {3,Q k + G k {Ck ,Q k
G k for k = 0, 1
)
)
and, since
C <
ejk
0,
)
for
A:
=
)
Ck = Ck (Q k Hk (3, Q k )-e k
,
the other hand, recall that the dichotomy property holds
Ck = Ck (Zk (3,e k ),Q k
at
all k,
:
d2 Ek
for
For
when
).
:
0,1.
'Then, the theory of access pricing is similar to the one of Section 3 but for marginal costs evaluated
the effort levels induced by the incentive scheme denned when sub-costs are not observable.
14
These related conditions are
d
dQ k
The dichotomy
different.
fdEk \
d 2 Ek
33
dCk d/3
V
J
requires
d 2 Ek
dCk
dQ k
8Q k d0
while the irrelevance of sub-cost observation requires
d2 E
=
dCk d(3
The
tfforallJfc.
class of cost functions
Ck (0,e k ,q k =
)
satisfies
the sub-cost irrelevance property for any d k
=
property for d k
On
3q k "
,
bk
e k qk
(with
bk
Ckqk >
0)
and the dichotomy
b k only.
Ck (3,e k ,qk = ^t
the other hand,
satisfies
)
the dichotomy property but not the
sub-cost irrelevance property.
Optimal Access Pricing
ernment Transfers
5
We now assume
us for
that the regulator
prohibited from transferring
is
example consider a constant returns to
irrelevance of subcost observability hold
Co
=
H
{3
l
let c
=
H
(f3
—e
)
cj
,
=
H\(3 — e
-
e Q )(q Q
l
x )
scale case
+
qi
+
qi{Pi,a
where the dichotomy and the
q2 )
(we omit the fixed cost for notational simplicity).
PoqoiPo) +Piqi(Pi,*
+
to the firm. Let
(/3-e l )q1
Under symmetric information, the budget constraint
-<-'o(<7o(Po)
money
:
C =H
and
Absence of Gov-
in the
+ c) + aq
2
of the
(p\,a
monopoly
is
+ c)
+ c) + q2 (pi,a + cj) - c^p^a + c) - t >
15
0,
(38)
where
must now be interpreted
t
consumer charges
The
U= —
(so
as the firm's
v(eo
t
+
regulator wishes to maximize, for each value of
subject to constraint (38) (where
U
is
leads to the incentive
=
-V(e
is,
-co (qO ( Po(0))
max
>
+
:
e 1 ((3))
(39)
(40)
0.
:
7i (pi(i3),
c iqi ( Pl (;3), a(/3)
[S(q (p (3)))
-Pi(0)qi
s.t.
+
+ V( qi
+
c)
program
regulator's optimization
/
:
+ Pi((3)qi (pM, a(0) + c) + a(0)q2 (Pl (/3), a(0) + c)
Po(/3)qo(po(i3))
-
each 3
for
social welfare
+ ei (/?)),
(/?)
-iP'(e (3)
U(0)
constraint
t,
namely
and individual rationality constraints
=
C\,
)-p l q l (p l ,a. + c)-(a + c)q2(pi,a + c) + [f
q (p
firm's rent,
t(3)
U(f3)
The budget
Cq,
the firm's welfare).
Under asymmetric information, the
U{B)
paid from
is
ei)).
S(qo{Po))+V(qi{pi,a + c),q2 {pi,a + cfj-p
The
manager's compensation and
(
a(0)
=
is
Pl (3), a(8)
+
c)
U((3)
+ q2 (P i(/3), a(0) +
+
0(«o(/?)
c))
+ eM).
(41)
:
+ c),q2
( Pl
(0),a(0)
+ cj) - Po(3)q
[pM, <3) + c) - P2(3)q 2 (pM, a(8) + c) +
(po(3))
U{3)\ dF(3)
(39), (40), (41).
Let fi(3) be the Pontryagin multiplier of the state variable
U
and
(1
+
multiplier of the budget constraint. Optimizing over prices we obtain the
as in Section
2 with \{3) replacing
sality condition fi(3)
=
0,
A.
\(3))f{3) the
same equations
Using the Pontryagin principle and the transver-
we have
16
Optimizing over
0'(eo(/9)
+
ci(/3))
effort levels
=
we
get finally
v
/
H'^qM + qi ((3) + q
:
2
((3))
~
Si k0)S0)d(3
,f
(i
\'\'j
"(eo(0)
+
+ Hp))S{p)
e 1 (0))
and
neoifi)
When
with
(
+
ei(fl)
=
SiMMiPW
/
-
#{*(/?)
-
.
^
{eatf)
+
ei(fl).
the dichotomy does not hold, formulae similar to those of Section 3 are obtained
1+A) /L)
replaced by
Sg\0)f0W
In particular the access pricing equation
a
"m
c0Q +
,
1
Under the assumption
+
P2
A(/?)
+
becomes
www
ss
,
(i
2
+
f
m)m
dQ\ c0eo
on how binding the budget constraint
is.
is
shifted
by the
upwards or downwards depending
Consequently, the access charge
than in the absence of budget constraint when the fixed cost
is
is
higher (lower)
high (low).
Access Pricing and Competitor with Market Power
Competition
for
(42)
/
of dichotomy, the ratios of Lerner indices are unaffected
lack of transfers, but the whole price structure
6
-coa]
a
in the
competition
electricity in
markets using the network as an input
in long distance
often imperfect, as
is
the case
telecommunications, or competition in the generation of
England. To account
analysis of Section 5 with the
is
for this
market power we pursue the balanced- budget
same technology (guaranteeing the dichotomy and the
irrelevance of sub-cost observation).
17
If
the competitor has market power and
is
unregulated, the maximization of expected
welfare must be carried under the constraint that the competitor chooses price so as to
maximize
its profit
:
+ ft#(ft,p2 -
ttfri.ft)
From
)
ap2
+ a) Aft,;*) =
(c
0.
r
(43)
tfp 2
we
the first-order condition of this maximization program (see appendix 3)
obtain the access pricing rule
:
09
1+
V2
X(/3) I
T/2
'/l^
(44)
-
TJ12V21
with
V2
=
7/i7/ 2
V2]
'
Equation (44)
is
superelasticity
and only
r\\
demand
if 7/217/12
corrected for market power.
>
—
7/1(7/2
1).
>
budget (reflected in A
power. To explain
7/ 2 i7/i 2
good 2 describe the
More
to offset the
demand
for
0) calls for a higher final price
increase in p 2 (that
monopoly
case
good
than
(t/ 2 i
2),
interesting
=
t/ 12
=
in the
However, with dependent demands, there
the expression of
t/j )
:
pi
is
is
monopoly
r/
2 if
<
0), n\
7/2
absence of monopoly
to a social loss equal
Because marginal revenue
in the access price) reduces this
is,
the
is
the need to balance the
monopoly power amounts
distortion.
changes
exceeds the regular superelasticity
demand
elasticity
notice that the
this,
It
-).
effects of
times the monopoly's profit p 2 <l2l Tl2i once the standard subsidy p 2 q 2 /V2
made
the
for
In the independent
and therefore (assuming a constant
in
7/1
and p 2 on the mark up or monopoly power 1/(1
in pi
to A
-
T]
complex, but can be given a natural interpretation. The two terms
the derivatives of the elasticity of
in
is
27/17/2
- U T]21
+ 7/217/2 -
(
see (44))
decreasing, an
is
Hence
profit.
7/2
a second effect (described by the term
<
t/
2
.
7/217/12
reduced to lower the monopoly profit p2?2/ r/2- To rebalance
consumers' choice between the two substitutes. P2 must also be reduced, and so must
be the access charge.
If
the social welfare function did not include the competitor's profit (an extreme
of depicting the redistribution problem), similar calculations
a
"An
=
C Q
+
-
\(3)
P2
t~t:^
would yield
P2Vij;{^)+PiVx2i: {^) +
:
^_
P2>
l+A(J)7/ 2
alternative formula would be obtained
way
7/17/2-7/127/21
if
a nonlinear access pricing rule was used.
conclusion.
18
See the
Restricted Regulation
7
In practice, the regulator
may
let (or
be instructed to
let)
the natural monopoly select his
and regulate only the price of the monop-
pricing behavior in the "competitive market"
olized
good and the access
set its
charges on value added services. This section studies the design and consequences
price to the network. For instance, France
of such restricted regulation
a competitive fringe.
We
We come
under simplifying assumptions.
is
free to
back to the case of
consider the class of regulatory mechanisms that associate with
an announcement $ prices po{P) and
The managerial compensation
a((3).
defined as a residual by the balanced budget constraint, once efforts e
Pi
Telecom
and
t((3) is
then
and
price
t\
have been chosen.
The
monopoly has an additional
analysis proceeds as in Section 5 except that the
moral hazard variable pi which leads to the first-order equation, that the monopoly's
marginal profit be equal to zero
:
9qi,
~ co ~
MP = qi + ^-[pi
i
Cl]
dpi
dq
2
+ ^\P2 - Co dp!
,
c]
=
0.
we make the following assumptions
Concavity of profit
:
dm <
*&£
dpi
Generalized strategic complements
The standard
:
^^- >
0.
condition for strategic complementarity
d
~
W + T^tPl
opi
°0
L
~
c l]]/ dP2
is
>
0.
J
Here, the monopolist also receives income from giving access.
for generalized strategic
complementarity
is
A
sufficient condition
strategic complementarity plus the condition
that the marginal profit on access increases with p 2 (condition that holds with linear
demand and constant
Appendix
6
returns to scale).
shows that
for a given
shadow
price, the access price is lowered relative to
the unrestricted control case, in order to reduce the
complementarity for a given p x
strategic
.
On
monopoly price through (generalized)
the other hand, monopoly power on good
1
To rebalance the consumers' choice between the two goods, p 2 must be raised.
The effect of restricted regulation on the access price is therefore ambiguous in general.
raises
px
.
However,
in the
case of linear
demand, for the optimal
remains the formula of full regulation.
19
pi,
the access pricing
formula
Access Pricing and Bypass
8
A
practical
problem encountered
ing access to the network
may
in
the telecommunications sector
useful as
is
is
the following
giv-
:
expands the space of commodities offered and
it
decrease the rents of asymmetric information by shrinking the incumbent's scale of
More
operation.
the incumbent
cations for
far
may
it
be useful for yardstick reasons
also
if
the technology of
correlated with the monopolist's technology. However, in telecommuni-
is
example giving access
possibility of
So
directly
to the
network to long distance operators leads to the
bypass of the local loop by large consumers to connect with these operators.
we had no need
of long distance,
to distinguish
between producer prices and consumer prices
and we could assume without
was
loss of generality that access pricing
the only tool used to oblige the competitor to participate in the fixed costs of the local
loop.
However, when bypass
is
feasible high access prices required for funding these costs
induce inefficient bypass.
Nonlinear prices for local telecommunication
there
is
a
much more
efficient
way
of dealing with this
necting consumer prices and producer prices
The monopolist has marginal
The
fringe has marginal cost C2
10
b is
the
same
is
Let t2 be a tax on good
is
2.
price of
good
With a competitive
=
2 charged to those
price of
good
—
a
[0,1] of
[0,
+ c2 + t2
a
=
The
cost
b.
c2
+
t2
= p 2 + b-
good
2
is
then
:
.
the local loop
is
.
through bypass
has paid a fixed cost
is
de facto
a
9.
See Laffont-Tirole (1990b) for a different example of the use of nonlinear prices to
9
However, this option
is
consumers
and a (low) marginal
00)
i
10
long distance.
Ci for
fringe the price of
who bypass
2 obtained
p2
given that consumer
But,
distributed according to a c.d.f. G(9).
p2
The marginal
network and
Let V(pi,p 2 ) be the indirect utility function.
p2
The
.
problem which amounts to discon-
Consider the case of a continuum
.
8
.
characterized by a fixed cost 9 €
for everyone, 9
help mitigate this dilemma
9
cost cq for the local
with identical preferences V(qi,q 2 ).
bypass technology
may
fight bypass.
rarely available to regulators.
The dichotomy property
is
assumed so that we can study pricing
issues independently of incentives
who bypass
For given prices (p u p2,a) consumers
are those with 9 lower than 9'
defined by
V(pi,p2 )
Leaving aside good
r
Max
9'
r*
[V(p u p 2
/
+
where
J
8m
= -9 m +
V(Pl ,p2
optimal pricing and access pricing are then the solution of
0,
+ b- a) - 9 +
[V(pi,p 2 )
+
(1
+ A)
(1
+
r
- c - Co)ft(a) + (p 2 - a -
Pl
x
(
-d-
A) [(p,
?i
Let
77 x
(a), 772(a),
demand
with the
=
=
?i(Pi,P2
+ 6 - a)
g 2 (a)
9l(?l,P2)
77 12
Let
AR
2)
AR =
is
-d-
(p x
an income
the switch occurs.
Co)(qi(a)
effect.
AR
<
It is
- qj +
(p 2
switches to bypass.
for raising funds,
means that
less
c2
-
co)q2 ]]dG(9)
dG{9)
(45)
seems
AR ~
difficult to predict
11
.
the sign of
Then, from appendix
p2
?2(Pl,P2)elasticities
demand
-
a
-
and revenues associated
t}i,t) 2 ,t]i2,t}2i,Ri,R 2
functions qi,q2
c 2 )q 2 (a)
If
we think
it is
-
(p 2
-
c2
.
-
co)q 2
.
of the difference between prices
the difference of "collected taxes"
taxes are collected
5
AR. So we
we have
when
when
the switch occurs.
(see equation A5.3 in
-
c2
Tf 2
"Co
if
the complete results only
+
A
1
XtJi
1
l+\rj 2
are superelasticity formulas for the hybrid population of consumers
bypass and those
Note that
A
1
-
will give
:
Co
p2
,
+ b - a)
when no switch occurs
Pl
rf l
?2(Pi,P2
5).
Pl-Ci--
1
-
n
c 2 )q 2 {a)
the loss of profits (including access charge and tax on
This should favor a lower access price than
where
(pa
functions qi(a),q 2 (a) and the prices Pi,p2 and let
and marginal costs as taxes
for
=
be the
(a), /721(a), i£ 1 (a), i? 2 (a)
when a consumer
appendix
=
72
the elasticities and revenues associated with the
It
+
co) 9l
:
for ease of notation
?i(a)
good
+ b-a).
in
who do
who
not.
addition a direct subsidy (or tax) for bypass was available this effect would disappear.
21
The
deviation of the access price from the marginal cost
Q
-
where
is
772
mation
f
1
are constant,
if
7/2l(a)
772(a)
f
the proportion of those
the classical super-elasticity and similarly
L
1
r72(a)/'
who bypass
ft
:
ss J71)
12
,
is
small (then
we obtain the
f2
*
72
approxi-
:
~
a
Pricing access at marginal cost
We
_
1
1+Alf2
p2
If elasticities
A
cp _
then
is
is
Co.
then appropriate.
have assumed here the existence of transfers.
If
there
is
no transfer, similar results
hold as long as the tax revenue on good 2 goes to the monopoly.
If not,
access prices
participate strongly in raising funds to pay for the fixed costs of the local loop and very
bypass
inefficient
is
be expected.
to
Access Pricing and Entry
nent Pricing Rule.
9
:
The
So far we have focussed on pricing access when there exist competitors
The concern was the
which need access.
firms. In other
cost.
The optimal
now
that the competitor
access pricing rule
for
some
services
efficiency of supply of services given existing
words we have assumed that the regulated firm's
the access price. Suppose
Compo-
Efficient
may be
must pay a
affected
rival enters regardless of
fixed entry or operating
by the existence of
this fixed cost,
because the entrant does not internalize the consumer surplus created by the introduction
of
good
Ideally one
2.
would
like to
use direct entry subsidies to deal optimally with the
entry decision. [Under incomplete information about the entrant's cost, one would need a
nonlinear transfer function of the quantity to be produced
is
about the variable
fixed cost
if
cost,
it
is
may be optimal
induce a better entry decision
about the fixed
cost]. In
the absence of such
to lower the access price obtained so far to
13
.
Also, concerned with entry decisions,
::
the asymmetry of information
and a stochastic decision of entry as a function of the announced
the asymmetry of information
alternative instruments
if
Baumol has proposed a simple and
In the absence of these assumptions different taxes for those
who bypass and
those
influential
who do
not would
be desirable.
:3
The
are a
relatively favorable interconnect prices levied
dynamic version
market structure.
A
on Mercury to access British Telecom's network
widely believed that they were designed to realise a particular
different but related reason for low access prices is the high switching costs of
of this point.
It is
consumers.
00
u
access pricing rule
,
In our notation, this rule
and
the monopoly's price
its
recommends an access
rule)
which
The
idea
and only
is
:
= pi-ci.
(46)
that an entrant with marginal cost c on the competitive segment will enter
if it is
more
efficient
p2
ECP
price equal to the difference between
marginal cost in the competitive market
a
•
(ECP
rule"
from the precepts of contestability theory.
follows
if
component pricing
called the •'efficient
=
a
:
+c=
(pi
-
Cj)
rule under perfect substitutes
+c<
The
:
pi
&c<
c\.
make
following assumptions
this rule
optimal. First, the monopoly's and the entrant's goods are perfect substitutes. Otherwise
entry by a less efficient entrant
may be
Second, the regulator observes the
desirable.
monopoly's marginal cost on the competitive market. Third, the entrant has no monopoly
power. Otherwise, the choice of p\ not only determines the access price, but also constrains
the entrant's
monopoly power. Fourth, and
relatedly, the technologies exhibit constant
returns to scale. Fixed entry costs for instance would create several difficulties with the
Baumol
On
rule.
On
the one hand, the no-monopoly-power assumption would be streched.
the other hand, the entrant might not enter because he does not internalise the increase
consumer surplus created by
in
[Incidentally,
pricing.
But, p 2
=
a
entry. Fifth, the
Baumol seems
+ c is lower
+ ci).] On
to
benchmark pricing
recommend Ramsey
than the Ramsey price for cost
(cq
rule
is
marginal cost
pricing as the benchmark.
+ c)
if
p\
the
is
Ramsey
the other hand,
if
those five conditions are satisfied,
argued that the access pricing rule (46)
is
irrelevant.
for cost (cq
should supply only access
(p\
is
irrelevant)
;
or c
>
C\
Either c
<
cx
it
price
can be
and the monopoly
and no access should be given
(a
is
irrelevant).
•
ECP
rule
under imperfect substitutes
differentiation (as
we have done
the competitive segment.
To
we assume constant returns
entrants,
until
:
now) to
In the rest of this section
justify the presence of several firms in
retain the spirit of the
for the
much
as possible.
known marginal
cost for the
Baumol
to scale, competitive entrants,
and the dichotomy property
we introduce
rule as
monopoly's cost function. For instance, we
can take the sub-cost functions assumed in Section
5.
The dichotomy
ensures that the
pricing rules will not be affected by incentive corrections.
•
4
is offered by a single supplier who also competes
the single-supplier component's price should
component,
offering the remaining product
See Baumol (1993)
with others
cover
its
in
:
"If
a component of a product
incremental cost plus the opportunity cost incurred when a rival supplies the
23
final
product".
our model the Baumol rule amounts to
In
a(0)=p (!3)-c 1
1
Competition
=p
1
(f3)-Q-.
competitive segment implies that
in the
= Pi(fl) + c — C\.
/>2(/?)
Optimizing expected social welfare under constraint (46) and under the incentive constraints (see
appendix
we obtain the
6),
=
a
access pricing rule
+
Coq
1
where
is
ife
an "average
V2
=
—
9i
T>2
:
+
.
,
Vi
+
92
to the formula a
—+
P2
92
;
9i
=
772
+ 92
Pi 9i
92
is
72i
;
= Coq + ^^L ^
772
92
72
here of dichotomy), the elasticity used
The
(47)
"
M/3) 72
elasticity"
Pi 9i
Compared
+
9i
9i
+
obtained in Section 5 (in the case assumed
not the correct one, namely
~ 7712*721
7l72 + 72 721
771*72
difference between the two formulas (assuming that there
centive correction) stems from the fact that the
Baumol
is
rule ties the
no need
Symmetric demands and
p2
-
c
-
Co
=
pi
-
ex
-
Co,
costs.
One then has
for
r/ 2
and
c
=
c\.
an
in-
:
These imply that
or
a
Thus
=
fji
for
two prices on the
competitive segment. Let us compare the two rules in some specific cases
-
(48)
»7l2-
92
symmetric demands and
=
-
pi
cx
.
component pricing
costs, the efficient
rule
is
consis-
tent with optimal regulation.
-
ous
Linear demands, symmetric
symmetry assumption
in
costs,
and captive customers.
one respect
the monopoly has captive customers while
:
competitors do not. Under linear demands, the
with d
<
b
and a 2 <
at
.
demand
9i
=
ai
-
&Pi
+ dP2
92
=
a2
—
bp2
+
>
pi
and
24
a
<
functions are
dpi
Marginal costs are identical
Pi
Let us alter the previ-
px
:
—
Ci
=
C\.
c.
Our formulas then
yield
The
intuition
that the
is
monopoly must charge a higher price than
because captive customers make markup relatively
markup on good
turn, this high
component
efficient
efficient in
can be viewed as an access subsidy relative to the
1
pricing rule.
previous example that ai
=
a 2 but c x
,
Pi
The
intuition
now
is
<
< p2
Then our formulas
c.
and
that under linear
partially reflect the cost differential c 2
—
<
a
demand
C\.
price cap
Price Caps
:
—
pi
Let us assume in the
yield
:
c\.
— p\ must
the price differential pi
There
The
"cost absorption".
is
must therefore be lower than that recommended the
Remark on
competitors
covering the fixed cost. In
Linear symmetric demands, cost superiority of monopoly.
-
its
efficient
Suppose that the monopoly
is
component
only
access price
pricing rule.
regulated according to the
:
a
with the access pricing rule
po
+
aipi
<
a
= pi-
cx
(49)
p,
:
or
p2
This of course
lator
If
makes use
(see
l
not pure price cap regulation (neither
a and a x
appendix
Pi
- Cqq _
(1
~
Cqq
-
a
''
J
\
.
On
-
Cigi
_
1
effort level
(?
-f
qx
q<i
respectively
~
v_
ft
we
=
Lqq
H
+
notice two differences. First
q2
and therefore Cqq
than under optimal regulation.
25
i\\ is
given by (49).
Then
—
the other hand, under a price cap, effort
production level
+
7o
the multiplier of the price cap constraint and
(48)
qx
v)
P\
Comparing with
and
7)
Po
is
practice) because the regu-
are chosen approximately equal to q
Po
where v
is
of the cost information c\.
the weights
we obtain
is
=Pi-c + c.
is
is
1
—
u will in general differ from
optimal conditionally on the total
evaluated at a (conditionally) higher
Access Pricing
10
To assess current practice
Co
in Practice
=
CqQ
+
Fully distributed costs
a)
in allocating
:
=
kQ C\
,
C2 =
and
Ciqi
cq2
The most popular method
.
of pricing access consists
the fixed cost to the firm's products in a mechanistic way. For instance, a
markup above marginal
product's
model, assume that
in the light of the theoretical
= Cqt —,
Po
may be uniform
cost
pi
=
(c x
+
Co)
+
—
This accounting rule generates "excess" revenue ^4°.
:
a
,
=
Cq
4. *ap. 4.
+
—
=
bm.
^
,
that covers the
fixed cost.
It
component
interesting to note that this accounting rule satisfies the efficient
is
pricing rule, as
Px
This of course need not be the case
-
cx
=
a.
Po
where 5
is
=
Co(l
+
6), pi
-
(co
+ ci)(l + S),
There
is
demand and
proper cost,
The
Oftel rule
and
B2 =
long distance, access).
The
co(l
+
S),
a.
is
(a
entry considerations.
:
—
The
idea of the rule
fully distributed costs. Let
arbitrary and has no reason to reflect the
The
access rule designed
Telecom's (BT) network can be sketched as follows
Ci)li,
=
no point dwelling on the conceptual drawbacks of
us just recall that the fixed cost allocation
b)
a
chosen so as to ensure budget balance, yields
Pi-cl >
—
of distributing the fixed
For example, a markup proportional to marginal cost, namely
cost.
A)
methods
for alternative
is
Co)q 2 denote
BT's
AD
"access deficit"
:
by Oftel
Let
B =
for the access to British
(po
profits in its various
is
B\
co)qo,
product
cost of giving access
is
BT's
=
(p\
—
lines (local,
here equal to the fixed cost
to set a usage-based price of access to
Namely the margin above the
—
ko.
local network.
proportional to the access deficit
per unit of BT's output in this activity and to the share of BT's variable profits provided
by this activity. For the long distance
a
-
c
activity,
=
AD
qx
one thus has
B
B + B + B2
x
x
26
:
l')0)
B
Xote that
2
depends on the access price and that
itself
mination of access prices under
fully distributed costs)
(as
is
the case for the deter-
formula (50) involves a fixed point.
In practice (again as in the case of fully distributed costs), the access price
outcome of a dynamic tatonnement, whose path ought
If
the budget
is
balanced (that
is, if
to be studied in
AD = B +Bi+B
2 ),
must be the
more
detail.
the Oftel formula interestingly
reduces to
= pi-ci
a
which
yields
To
there
exactly the "opportunity cost" of
is
under budget balance the
is
is
Oftel formula thus
rule.
usage -and not only cost- based, suppose that
competition not only on the long distance domestic market (goods q x and q 2 ),
but also on the international market (good q$ produced by
competitors).
its
The
in the activity.
component pricing
efficient
see that the access pricing rule
BT
The
BT
and good
q4
produced by
Oftel rule then defines different access prices for competitors, a 2 on
the domestic long distance market and a 4 on the international market despite identical
access costs
15
With obvious
.
a2
~
cO
=
notation,
AD
B
TT
HLoBi
x
aQ d a 4
^TJ
1l
~
<k>
=
AD
B3
93
Ef=0^i'
and so
a4
The markups
The
Oftel rule
is
-
=
Co
-5-7—
n 3 /q3
(51)
•
are thus proportional to BT's unit revenues on the competitive segments.
therefore related to our access pricing formula, in that both are usage-
revenue imposed by competitors on the network provider. The
based and
reflect the loss of
difference
between the Oftel rule and our formula (29)
is
that the unit revenues replace
the superelasticities.
11
Conclusion
In a first best world, access pricing to a
network
(like
any other pricing) should be marginal
cost pricing. In practice the appropriate rule departs
from the
first
best
and depends on
the constraints and on the available instruments.
First, the provision of the
nondistortive
;;;
lump sum
taxes.
For the sake of the argument.
network imposes fixed costs which cannot be financed by
Competitors should then contribute to the fixed cost of
In practice, a
domestic
therefore network costs
may
call
uses two domestic local loops while an
Further, the access price peak load structure can only be coarse, and
differ for the two types of calls if their timing stuctures differ within pricing
international call uses only one.
bands.
27
the network. This contribution, which takes the form of an access price above marginal
cost, reduces either the financial
burden of the regulator
(in
the case of transfers) or the
price distortions associated with the firm's budget constraint.
Second, asymmetric information of the regulator about the firm's costs
may
introduce
other standard distortions, because informational rents must be taken into account
defining proper marginal costs.
may be
Further distortions
desirable
if
when
network and
competitive segment subcosts cannot be disentangled.
When
taxation of the competitive goods
is
feasible, access
can be priced at marginal
cost while taxes contribute to covering the fixed cost. [Note nevertheless that the marginal
cost referred to
firm,
and
is
is
the marginal cost which arises from the optimal regulation of the
in general different
from the
first
best marginal cost because effort
This disconnection of consumer and producer prices
very handy
is
competitive segment can bypass the network.
By
and taxation mandates reduces the
number
price
regulators'
if
consumers on the
contrast, a separation of regulatory
of instruments,
must then arbitrate very imperfectly between the goals of limiting
and participating
pricing rules
to the coverage of fixed costs.
become more and more complex
to use access prices, rather
lower].
is
It is
clear
and the access
inefficient
bypass
more generally that
access
as well as inefficient as the regulator tries
than complementary instruments, in order to meet various
market structure goals such as inducing proper entry or reducing monopoly power
in the
competitive segment or to achieve distributive objectives.
Last,
we have shown that our
analysis can shed substantial fight
on the effectiveness
and of
existing policies
Looking forward, our analysis can be pursued in several directions.
With a proper
component pricing
of policy proposals such as the efficient
rule
such as the Oftel rule for British Telecom.
regulatory model of predatory behavior, one should be able to investigate the conjecture
that access pricing
products.
The
is
a
intuition
more
is
efficient tool to
the following
:
A
prey than the pricing of the competitive
low price
for the competitive
product signals
a high efficiency. This information can be used by the regulator to extract the monopoly's
rent in the future.
On
the other hand, a high access price seems
immune
to ratcheting.
Next, one could substitute to the optimal regulation various types of current regulations (price cap, rate of return)
and analyze how the deviations from optimal regulation
impact on the access pricing formulas (see
for
example the Remark
could even depart from the regulatory context and see
in Section 9).
how competition
One
policy alone would
deal with access pricing. Excessive access prices could be considered as a predatory tool
to
eliminate competition as has been claimed in the
Our framework
AT&T
also enables us to discuss a current
case before divestiture.
debate in Europe. Telecommuni-
cation companies are required to offer universal service of local telephone (here good zero)
23
at a
low price. Their budget constraint would normally force them to increase the price of
their other services as well as the price of access to the network.
A
concurrent low-access-
Community might demand marginal
charge constraint (for example the European
cost
pricing in order to increase competition) then forces the network firm to further increase
the price of
its
other services and and to lose
its
competitive edge.
We
are not then
very far from the solution adopted by the U.S. courts, which prohibits the network from
offering competitive services.
There, universal service
charges to the network instead of the profits
made by
is
financed by appropriate access
the network firm on
its
additional
services as in Europe.
We
have not discussed nonlinear access pricing
rules, for
long as the fixed part of the tariff plays the role of a
money needed
to raise the
to
pay
lump sum
tax,
it is
for the fixed cost of the network.
take in account the fact that beyond
rate (see for
example two-part
some
example Laffont-Tirole (1993)
level the fixed
ch.
2).
tariffs.
As
an excellent tool
However, one must
charge lowers the connection
Similarly
we have not
discussed the
important practical issue of peak load access pricing.
Finally, let us stress that, to a large extent,
we have
left
aside various
dynamic
issues
:
investments (in particular unobservable specific ones) for network development (see however
Remark
4 in Section 3), consequences of regulators' limited
well as regulation of entry. Inefficient
commitment power,
as
developement of the network, more costly rents of
asymmetric information, and inadequate entry behavior are then to be expected. These
questions can be addressed within our general regulatory framework (see ch.
in Laffont-Tirole (1993) for the basic principles).
29
1, 9,
and 13
APPENDIX
1
:
Optimal regulatory rule (Section
Let n(f3) be the co-state variable associated with U.
m
Using the transversality condition
The
=
fi(0)
=
3)
From the Pontryagin
principle
a/09).
we have
differentiation of the Hamiltonian
H=
{S(q
(po(m +
V( qi ( Pl (l3),p 2 (/3),qM{3),p 2 (j3)))
+x[po(/3)q (p (P)) +Pi(0)<h(pi(fl),M0)) +P2(P)<h(Pl{0),Pi(0))]
-(1
+
A)[tf(e
(/?)
+C
l
+
e x (/?))
+C
(f3,e (/3),q (p (f3))
({3,eM,q1 (p-MP2(0)))
+ qx{pi{P)MP)) + ft(M0),ft(0)))
+ cq2(pM,P2(P))] -
W(fi)}flfi)
- /,(/3)^( e o(/3)+e (^)){^(/3,Co(^ eo (/3),?o(po(/3))+?i(Pi^),p 2 (/?))+?2 (Pi(/?),P2(/?))),
1
qo(po(0))
+ <h(pi(0),P*(0)) + <h(Pi(P),P2(0)))
+|j(/3, Ci{0, e l (/3), qM/3),p2 (0)), qi(P M,P2(P))) }
with respect to p
and
,
px
,
p 2 gives (24), (25) and (26) and with respect to
(31).
30
eo,
t\
gives (30)
APPENDIX
Part
(i)
results
dC k d(3 =
is
—*
k
for
same
the
from
=
Sub-cost observability
:
To prove that sub-cost observation
(37).
is
useless
1,2 note that, at the optimal regulatory policy,
That
for all k.
is,
when d 2 Ek /
(—dEk /8Ck
,
Q(P),qi(0)} under sub-cost unobservability, where C{/3)
This incentive scheme
announces
type
is
incentive compatible.
To show
= CQ (0) +
this, it suffices to
—
Ci(0).
show that
if
choose the sub-cost allocation {Co(/3),Ci(/?)} corresponding
will
it
)
given the firm's scheme under sub-cost observability,
{t(0),Co (0) ,Ci(/3),Q({3),qi(fi)} consider the associated incentive scheme
{t(0),C(0)
to its
2
announcement, even though the regulator cannot control sub-costs. Note that from
(37), there exists
a such
that
^(P,C
k (f3),Q k ((3))
=a
k
= Q,l
and
CQ 0) + C 0) = C0),
l
where
Q =Q
and Qi
=
qx
.
But the condition d 2 Ek /dCk 80
=
implies that
^0,C
k
0),Q k (J3)) = a
for all
Jfe,
as well.
From our assumption, {C
when
it
announces
3.
We
(/3)
+
C*i(/3)
=
C({3)}
is
the unique cost minimizer for type
can thus implement the same allocation when sub-costs are
unobservable as when they are.
31
APPENDIX
3
:
Competitor market power
Because of the dichotomy assumption, the optimization with respect to the access
price can be carried out
under complete information
ma* {S(q
PO,
(p
))
+
:
V(?i£pi, p2 ), 72(^1,^2)) -po?o(po)
-PiViiPiito)
~
+ c)q2 (pi,p2 )}
(a
(A3.1)
s.t.
poqo(po)
+ piqi(pi,P2) + aqiipuPi) >
-ci?i(pi,p 2 )
+ P2j-^(pi,P2) -
ftOi.Pa)
From
+ qi{pi,P2) + ?2(pi,P2))
co(go(po)
^(eo
+
(A3.2)
ei)
+ c)^-(Pi,P2) =
(a
(A3.3)
0.
(A3. 3)
a
+c=
p2
gafoi.P?)
= p 2 (l + g——
!
l/T} 2 (pi,p 2 ))-
222.f
stlPi.Pz)
Substituting into (A3.1), (A3. 2)
max \S(q
P0.P1.P2
(po))
we have
+ V(qi(p lj p 2 ),q2(pi,P2))-Poqo(Po)-Pi<li(PliP2)-P2<h(Pl,P2)+
L
~ 7~
*'
x
^iPllPij
s.t.
Po<7o(Po)
+Pl9l(Pl,P2)+P2?2(Pl P2)
J
-ci?i(pi,P2)
-
c?2 (pi,P2)
-
>
2
1
+ A(/3)
J
v
,
7
Let
+ ?l(Pl,P2)
Co(?o(Po)
+ V>( e o + ci).
72lPl ? P2J
denote the multipher of the contraint.
We
substitute A to X(f3) below for
convenience.
Maximizing with respect
dV
to (pi,P2)
dqi
dqx dpi
+(1
+ A)
dV
we obtain
dcfr
__
dq2 dpi
d?i
:
d<h
^92
_
dp x
dpx
,
3pi
32
+?2(Pl,P2))
<9?2
/dgi
9pi
Vdpi
,
^<72
dp!
d<?i
dg 2
dp\
dp x
1
dK
dp 2
dqi
+(1
dV
dq^_
dq 2
77 2
dq 2
dqi
dq2 dp 2
2
dp 2
2
dp 2
dq
+
A)
dp 2
5p 2
dpi
dq
c—
dp
dqi
\dp2
dp 2 J
2
'Ci-z
op 2
dgl
dpi V
dp2
2 \
\
72
d
*9<72
dpi dpi
Pi
dg2
dqi
-
p2
—
Co
-
-
Cq
-?i
C!
+
(Piq-i
dpi V
+
1
c
A
-72
dp 2 dp 2
d (p 2 q2
Op 2 \ 772
+ p—
,
-i
-
Pi
Vi
~
Co
—
—
co
Ci
dpi dpi
71
1
c
+
+
A
1
P2
+
A
dqi
72
The second term
(dqi dq 2
dq2 dq 2
Kdpi'dpi
dpi dpi
p 2 ( dqi dqi
dqi dqi
dpi' dpi
dpi'dpi
2
El
11
§3x.
_
i3X
+ Piqi
+ P272
+
A.
El
72
^2L
tji
dpi\
.
772
dq2 d (
dpidpi
d
dqi
^22.
'
dpi
dpi
1
^
dqi
dpidp 2
(
dqi
1
P^A '1}
33
^
+
+
11V2
7i272i
R7V1
1
12m
<fr
dpim
\Tji/
7i272i
~
dqi
]
d
+ Pi7i2ai7 (*)]
7i72
1
dpidpiKrjiJl
Pi72a|-(^)+P272i4(^
-
d f
\rji
dpidpi\t}iJ
7i72
1
\
d fpiqi
dqi
dpi dpi
.
dpi 'dpi
r]
dpi
of the right-rand side equals
11I
P:
d (p 2 q2
dqx_ dcfr
£i
772
'
dqi qi
dpiT) 2
.
Pi
-
Co
-c
A
x
Pi
Pi
-
Co
-
A
+
1
A
^4(i)+P272l4(^)
7l72
7l
A
c
P2
here
+
1
fti
1
1
1
72
72
1
mi
- 712 721
^7iafe(^)+P27i2^(^)
7i72 - 7i272i
R k = Pkqk-
Since a
a
=
=
p2
—
c
—
Ei
we have
,
HP)
Coo
r
72
1
+
A(/?)
1
:P2—"
X(fi)
72
1
+
P 2 7i^(^)+Pi7i2^fe)
A(/3)
7i72
with
72
=
7i72 -712721
72'
27i72
+ 72i72 - 72i7i2 - 7i
34
-
Vi
712721
APPENDIX
The dichotomy
4
Restricted regulation
:
implies that price formulae can be obtained as in the
full
information
case. Let
W = S(q
)
+
V(qi, q2 )
-p
- Piqi - p 2 ?2
q
denote the consumer net surplus, and
MP =
dqir
qi
+ p- \p x -
co
-
dq
2
+ p- [p2 .
,
c, ]
dpi
co
-
c]
dpi
denote the monopohst's marginal profit and
let
P
denote
its profit.
The planner
solves
W
max
{po.Pi.w}
subject to
P-V=
(BB)
p q
+p
x
+
qx
(p 2
-
MP =
Let
(1
+
hand
side of
to pi
is
A)
and v denote the shadow
{BB)
c x qx
-
xj)
=
and
0.
prices of the
maximized with respect
is
- CoQ -
c)q 2
to
two constraints. Because the
p x the
,
left-
first-order condition with respect
:
dW
dMP \
dpi
f
V dpi J
Because the net consumer surplus decreases with
sumption on
profit,
we obtain
1/
<
0.
The
prices,
and from our concavity
derivative of the Lagrangian with respect to
as-
p2
yields
dW
—
+
-
dp 2
The
ing.
first-two terms are the
The
,
(1
-dP
dMP
+ A)— + !/-— =
standard terms obtained in the absence of monopoly pric-
correction in the access pricing formula (a
d(M P)/dpi,
which
is
equation shows that
lowered. But pi
is
n
0.
dp2
dpi
= p2 —
c)
depends on the sign of
positive under generalized strategic complementarity.
for
a given p\ the price p 2 and therefore the access price, should be
also increased
,
and the
result
ambiguous. However,
functions and constant returns to scale both effects cancel, giving the
formula as
This last
in the case of full regulation.
35
for linear
same
demand
access pricing
APPENDIX
=
Let 6" be defined by 6'
V(p u p2
+b-
-
a)
5
V( Pl ,p 2 ).
Hence
38'
0^ = 91- ft(«)
89'
=
ft
+
(p 2
dp 2
-
ft(a)
80'
Let
AR =
(/?!
-
-
ci
Co)(qi(a)
-
qi ))
Maximizing (45) with respect to Pi,p2 ,a
GOT
\ qi (a)
(1
+
A) [fo
"Aft
+
( 1
+
-(i-c(n)
+
- Cl -
A)
[(
-
yields
-(i-G(e-)) \q2
+
(1
{pi
+
+g(6')[q2
<?(*)
-
Aft(a)
-
(1
+
(p 2
-
- Co)ft.
c2
:
dq
-a- ca)^(«)]]
2
+
(p 2
- d - Co)p + (p2 - Co - c2
Pl
~ Cl "
+
dq x
co)
ir
)p]]
=
A)AiE
^df^ +
(pi_Ci -
A)
-
c 2 )ft(a)
co)2jL(a)
+^*)(ft-?i(a))(l
G(P) \q 2 (a) + (l+\)
-
a
(A5.1)
{P2
~
a
~ C2) df {a) }}
2
+(P2 -
C2
"
co)
a|]]
-q (a)](l+\)AR=0
A) (pi
(.45.2)
2
- Ci
-^
(a)+(P2_a
"
C2)
dpi
+<7(0*)ft(a)(l+A)Ai2
dp
l:
(a)
2
=O
(-45.3)
Hence
G(O') Aft(a)
+
(1
+
A)( Pl
-
dqi
Cl
- co)^-(a)
dpi
-(A
<?2
+
(a)
(l
+
A)(p 1
dft, -,\d<l2/dpi(a)
-c - Co )^(a))
1
/
<9p 2
•(l-G(n)
Aft
+g[9')(l
+ (1+A)
+ X)AR
q\
(pi
-
Ci
-
Co)5pi
-qi(a) -92(a)
36
]]
dq2 /dp 2 (a).
h [p 2
-
Co
dq2 /dpi(a)
dq 2 /dp 2 {a).
-
c2
)
—
dpi!
=
0,
and
[1
-
G{6-)
A<7 2
+
(1
+
A) (Pi
~ Cl - Co) -5^?l
+
(1
+
A)Afl
AR, we
=
(a)
fe-
32
(i-g)S
3p2
-
C2
-
.
x
5 <72
Co)
dp 2
O
the case
will consider
-^ iw) +(i - G)
G (^ (a)
A)
(p 2
dp 2
+<K0")?2(l
Given the ambiguity of the sign of
/_
,
1-
AR = 0.
-
-
^- G )Sf
(Pi
a -<?)§*
(P2-Co-C 2
ci
Co)
)
-Gx{ql (a)-q2 (a)^)-X(l-G)q1
-(l-G)Xq2
or
(1+A)A
Pi
— Ci — CQ
p2
-
Co
-
<*1
a2
c2
9«
det
A=
G(l
dP7
- G)^-.A(a)
+ (1 £21
3ps
G) 2 A
(«)
with
dq 2
dq2 dqi
dq x
dq2
dqx
dq2
dpi dp 2
dpi dp 2
dpi
op 2
dp 2
dpi
3<?i
A~ =
l
(1-G)2a
9pj
_(1_ (7)^22.
1
det
A
,
>
a-ofe
^M +
3ps
(1
_
(71^2L
ap,'
This yields
X[G(q1 (a)Pi
-
ct
-
c
q2
(a)^)+(l-G)q ](l-G)^ + (l-Gy\ q
/2 a
1
„
=
(1+A) (l-G)2 A + G(l-G)A(a)(§£/i£(a)
\[<?( 9l (a)
P2
-
fc(<0|i£|)
+
(1
~
G)ft](l
-
G)fg-
-
A(l
- G)q2
GAla)
dp;
— Ct — Cq =
(1
+
A)
(l-G)*A + G(l-G)A(a)(f*/fa(a)
37
:i-g)£
9pi
^_ Gm^(l + *ll$)+(l-G){V2 +
Pi-cx-q, =
L
Pi
-c -co
P2
1
V2
+
^
GA(a)^J
{^V
a
2
+ A-
+
+ (l-G)A
rii2)
^+i8)+(
1
A
g
1
+ Afi
-^(*+'*>j_
with
A=
A(a)
These formulas reduce
From
=
7/17/2
-
7/i(a)7/ 2 (a)
7/127/21
-
7/ 12
(a)77 2 i(a).
to the classical superelasticity formulas
when
G = 0.
(A5.3)
cp-a _
P2
A
l
+
Pi-ct -
1
A7/ 2 (a)
l
+
cp
772(a)
pi
Al7/ 2 (a)
7/
33
u (a) Rxja) _
T]
1 7/ 2
(a)
(a)
_ff 2
/'
7/"
2
A
,
"1 + A^2
G A(a)^^ + (l-G)A
A"
_1
p2
- c 2 - Cp
p2
APPENDIX
The
6
program
regulator's
then
is
-H
x
-
{3
e x (/?))
+
c)q2
Pricing rule
:
H (0 - eM) + c)
- pMqi(pM,pM -
-po(/%o(po(/3))
-( Pl (/3)
Component
Implications of the Efficient
:
t
(pM, Pl (0) - Hx (/3 - e x {P)) + c) + U({3)]dF((3)
s.t.
f/(/3)
=
-V'(e
(/5)
W) >
+
e 1 (^)),
o,
and
MJ)qo(M0))+Pi(P)<iM0),Pi(0) - Hi(0 - d(0)) +
+
-
Pl (/3)
H
x {fi
[
-i/
-
(/3
e
-
ei(/3))j? 2 (pi(/?),Pi(^)
(/3))(<7o(po(/?))
-
-
ei (/3)) ?1 ( Pl (/3), Pl (/3)
Proceeding as
in
Section 5
0'(e o -r e x )
ty
(e
+
ei
)
=
=
ff£( 9o
-
H
x {f$
etG9))
c)
+ c)
+ c))
eM) + c) - tf(0) - 0( eo
co
+ ?i + ft) -
f$~\0)f0)d0
~
+
Sjwmw
—
w
- ci)p— +
(Pa
A(g)
l
(
^
+
.
+
A(/3)
39
+
"(go
r
,
ei
)
+ c - coJo—
-(ft+ft)
/
+ A(^)\^22i +
A(/3)
l
^
^
lHI
=
Pi-Cog-Ci„ =
Pi
-
+
(/?)
+
we obtain
fl,fli
+(Pi
-
ei(/?))
+ ?i(Pi(/3),Pi(/?) - #i(/3 -
+?2(pi(/3),Pi(/3)-^i(/3-e 1 (/3))
-fft(/3
-
i5Ti(/J
c)
1
17"'
^zi
+ d)
A(fl
=
ft
e^/?))
=
0.
with
*0J (-£-).
p2
\qi
+92/
—7—
•72
721
><7l+92
M?12-
Hence
00
,_M0)_PL = c
1
with
772
+
A(/3) 77"
= f^'
40
*
A(j9)
1
+
P2
A(0)itf
MIT LIBRARIES
3 9080 00922 4913
APPENDIX
7
:
The
The Lagrangian
of the
H
){qo(po)
poqo(po)-
(P-e
monopoly's optimization problem
+ q {puPi- H
-
-0(e o
first-order conditions
{/3-e l (l3)) + c)
l
l
+( Pl -#!(/?- eOJfafa, Pl
The
Component Pricing
Efficient
H {$ - e
x
x
{ff))
po
with respect to pQ and p x are
,fdqi
,
If
a
~
qQ
and a!
~
qx
+
=a
90
1-
q2
dq2
dq x
v
—
Co
Po
Pi
is
\
- Co -
l
—
i/
»7o
Ci
Pl
r/j
dq2
,
po
where
+ q2 (p u p 1 - H (P-e
- o-iPi).
apo
l-v p 2
^2
given by (47).
41
Pl
under price caps
is
+ c) + q2 (p1 ,p1 -
+ ei) + v(p - a
(po-coH
rule
1
H
x
tf
-
1
(/3))
e x (0))
+ c))
+ c))
REFERENCES
BAUMOL,
W.J. (1983), "Some Subtle Pricing in Railroad Regulation", In-
ternational Journal of Transport Economics, 10, 341-355.
BAUMOL,
phone
W.J. (1993), "Deregulation and Residual Regulation of Local Tele-
Service',
AEI
Studies in Telecommunications Deregulation, Ameri-
can Entreprise Institute
CAVE, M.
(1992),
kets in the
Public Policy Research,
for
"The Growth of Competition
ENSTT
UK",
Colloque
-
in
New York
University.
Telecommunications Mar-
Le Management des Entreprises de
Reseau.
LAFFONT,
and
J.J.
J.
TIROLE
(1990a),
"The Regulation of Multiproduct
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LAFFONT,
and
J.J.
J.
TIROLE
American Economic Review,
LAFFONT,
J.J.
and
and Procurement,
NOLL, R.G.
(1990b), "Bypass and
Creamskimming"
80, 1042-1061.
TIROLE (1993), A
MIT Press.
J.
Theory of Incentives in Regulation
(1989), "Telecommunications Regulation in the 1990s" in
Directions in Telecommunications Regulation Policy, Vol.
ed.
Duke
VICKERS,
kets",
University Press,
J. (1989),
Newberg,
Durham and London.
"Competition and Regulation
in Vertically
Related Mar-
mimeo.
WILLIG, R.D.
bing
1, P.
New
(1979),
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in
H.M. Tre-
Michigan State University
Date Due
n
t
I
6
W*
1
I
Lib-26-67