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Impact of access regulation on investment reconsidered

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  • Chen, Zhihong
  • Chen, Zhiqi

Abstract

In regulated industries like electricity, gas, and telecommunications, regulators often require vertically integrated incumbents to share their infrastructure with competitors in a related market. This paper demonstrates that such access regulation may strengthen an incumbent's incentive to invest in infrastructure even if the regulated access price of an input is set at its marginal cost. Specifically, we reconsider Kotakorpi's (2006) model under an alternative circumstance where downstream rivals would be foreclosed from the market without regulation. We find that the access regulation increases investment and improves social welfare under certain conditions. Our main conclusion is robust to an alternative way of modeling consumers' valuation of products. Furthermore, raising the access price above the marginal cost expands the parameters for which the regulation increases investment. Our analysis suggests that access regulation alone does not reduce an incumbent's investment incentive.

Suggested Citation

  • Chen, Zhihong & Chen, Zhiqi, 2024. "Impact of access regulation on investment reconsidered," Economic Modelling, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:ecmode:v:136:y:2024:i:c:s0264999324000907
    DOI: 10.1016/j.econmod.2024.106734
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    References listed on IDEAS

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    More about this item

    Keywords

    Access price; Regulation; Investment;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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