Competition, access pricing and regulation in a second degree price discrimination setting
In broad terms, this work aims to gain a greater understanding of the particular features introduced in the regulatory set-up by competitive issues and vertically related markets. Specifically, we explore their impact on the profitability of the market and the p~ssibility for the incumbent to maintain monopoly profits under different regulatory regimes. There was a time when utilities industries and in particular telecoms each seemed to be a natural monopoly. Most governments liked it that way because they owned the monopoly and siphoned off some of the profits. Nowadays, competition is spreading in most utilities market and it becomes imperative to assess its impact on the tariffs and in general on social welfare. We deal with a second degree price discrimination model allowing the players -namely, an incumbent, who has a natural monopoly on the network, and a rival- to make use of non-linear pricing in intermediate and final goods. In this framework the entrant's choice of the customer types is endogenised in a sequential multistage game, where the incumbent, who is undoubtedly the most powerful player, acts as a first mover. We also show that cream skimming, contrary to the general wisdom, can be welfare enhancing. Particular attention is devoted to the access pricing problem which is becoming the key issue to the regulators, examining the relevance of simple pricing rules, such as the Baumol-Willig rule. Despite the presence of a growing literature in these areas, other models fail to incorporate the use of non-linear access pricing. Since price discrimination is common in practice this omission can lead to misleading results. Our analysis shows that the regulator should not allow competition for the low-demand consumers' types or by a less efficient entrant and should impose the adoption of socially optimal non-linear access tariffs. Therefore the general conclusion is that competition will not obviate the need of regulation.