Level Playing Fields in Regulated Network Industries: Cost-Based Access Pricing, Depreciation, and Capacity Choice

29 Pages Posted: 27 May 2009 Last revised: 13 Dec 2009

See all articles by Sabine Böckem

Sabine Böckem

University of Basel

Ulf Schiller

University of Basel

Date Written: October 20, 2009

Abstract

We investigate cost-based access pricing in regulated network industries. Building on recent progress in the accounting literature, we show that a regulator must choose a particular depreciation schedule, namely, relative replacement cost depreciation in order to prevent the network provider from playing manipulative games with the cost-based access price. We then show that the network provider is put at a strategic disadvantage if the regulator sets the access price equal to long-run incremental costs and the downstream market is symmetric. This result may be understood by looking at strategic interaction in the downstream market where both firms are better off if they behave “softly”. If the regulator sets a low access price, he commits the downstream competitor to price aggressively. Then, the entire burden of softening competition must be borne by the network provider. Finally, since consumer prices are decreasing in the access price, we conclude that the regulator faces a tradeoff between low consumer prices and a level playing field on the downstream market.

Keywords: access pricing, depreciation

JEL Classification: M40, M46, D40

Suggested Citation

Böckem, Sabine and Schiller, Ulf, Level Playing Fields in Regulated Network Industries: Cost-Based Access Pricing, Depreciation, and Capacity Choice (October 20, 2009). Available at SSRN: https://ssrn.com/abstract=1410047 or http://dx.doi.org/10.2139/ssrn.1410047

Sabine Böckem

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Ulf Schiller (Contact Author)

University of Basel ( email )

Peter-Merian-Weg 6
Basel, 4002
Switzerland

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