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Access Price Cap Mechanisms and Industry Structure with Information Acquisition

Author

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  • Francesca Stroffolini

    (University of Napoli “Federico II” and CSEF)

Abstract

This paper considers a network industry characterized by an upstream natural monopoly with cost uncertainty, regulated through an access price mechanism, and an unregulated downstream market with Cournot competition. The upstream monopolist can acquire information on the upstream cost while the information acquisition is prohibitively costly for the regulator and downstream firms. The information acquisition is also unobservable. I investigate how the presence of costly and socially valuable information on the upstream cost affects the desirability of allowing the upstream monopolist to produce in the downstream market (integration) rather than excluding it (separation). I show that when the upstream monopolist is regulated only through an access price cap, the information acquisition problem provides an argument in favour of vertical integration. However, when the regulator also obliges the upstream monopolist to share her access profits with consumers, a bias emerges in favour of separation via the impact of the access-profit sharing plan on the upstream monopolist's incentives to transmit information to her rival in the downstream market.

Suggested Citation

  • Francesca Stroffolini, 2008. "Access Price Cap Mechanisms and Industry Structure with Information Acquisition," CSEF Working Papers 193, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:193
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    File URL: http://www.csef.it/WP/wp193.pdf
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    References listed on IDEAS

    as
    1. Elisabetta Iossa & Francesca Stroffolini, 2007. "Integration and Separation with Costly Demand Information," The Centre for Market and Public Organisation 07/167, The Centre for Market and Public Organisation, University of Bristol, UK.
    2. Cremer, Jacques & Khalil, Fahad & Rochet, Jean-Charles, 1998. "Contracts and Productive Information Gathering," Games and Economic Behavior, Elsevier, vol. 25(2), pages 174-193, November.
    3. Armstrong, Mark, 2001. "The theory of access pricing and interconnection," MPRA Paper 15608, University Library of Munich, Germany.
    4. Laffont, Jean-Jacques & Tirole, Jean, 1996. "Creating Competition through Interconnection: Theory and Practice," Journal of Regulatory Economics, Springer, vol. 10(3), pages 227-256, November.
    5. Dov Fried, 1984. "Incentives for Information Production and Disclosure in a Duopolistic Environment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(2), pages 367-381.
    6. Iossa, Elisabetta & Stroffolini, Francesca, 2002. "Price cap regulation and information acquisition," International Journal of Industrial Organization, Elsevier, vol. 20(7), pages 1013-1036, September.
    7. Cave, Martin, 2006. "Six Degrees of Separation : Operational Separation as a Remedy in European Telecommunications Regulation," MPRA Paper 3572, University Library of Munich, Germany.
    8. Littlechild Stephen, 2003. "Reflections on Incentive Regulation," Review of Network Economics, De Gruyter, vol. 2(4), pages 1-27, December.
    9. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 27, pages 1557-1700, Elsevier.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    access price cap mechanisms; integration; separation; information acquisition.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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