Quality upgrades and bypass under mandatory access

Authors: João Vareda

Publish Date: 2011/06/04

Volume: 40, Issue: 2, Pages: 177-197

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Abstract

We analyze the interaction between the incumbent’s incentive to upgrade the quality of its network and the entrant’s incentive to build a bypass network when the regulator sets a twopart access tariff to the incumbent’s network Under this context the entrant’s investment in a bypass network is delayed with a higher incumbent’s investment in quality Moreover the possibility of investment in a bypass network by the entrant has a positive effect on the incumbent’s incentive to upgrade quality We show that a regulator cannot achieve the first best with a constant access tariff If he wants to design an alternative welfare improving access tariff he should set an access fee increasing decreasing in quality if the businessstealing effect of quality upgrades is weak strong The analysis suggests that if the entrant’s investment costs are declining or its market share is increasing over time it is not always optimal to require the incumbent to lease facilities at costbased prices

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