Essential Facility Financing and Market Structure

51 Pages Posted: 26 Jun 2001

See all articles by Bernard Caillaud

Bernard Caillaud

CERAS-ENPC; Centre for Economic Policy Research (CEPR)

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI); University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)

Date Written: May 2001

Abstract

The Paper analyses the funding of an infrastructure project (high speed train line, platform, tunnel, harbor, regional airport, fibre-to-the-home network, etc.) in a situation in which an incumbent operator has private information about market profitability (demand, cost) and the infrastructure owner is subject to a budget constraint, either on a per project basis or over the entire infrastructure. An open access policy raises welfare, but may make the project non-viable since funding must be provided by capital contributions and access charges. The infrastructure owner can ask the incumbent for a higher capital contribution if the latter insists on an exclusive use. Yet, such screening is at odds with social goals: The incumbent is willing to pay more for exclusivity, the higher the demand (the lower the cost), that is precisely when competition yields the highest benefits. At the optimum, the incumbent's information impacts the decision of whether to build the infrastructure, but is not used to determine market structure. The Paper further shows that an absence of long-term licencing favours monopoly franchising, while a threat of regulatory capture creates an open-access presumption.

Keywords: Access, competition, essential facility, financing

JEL Classification: D40, L51

Suggested Citation

Caillaud, Bernard and Tirole, Jean, Essential Facility Financing and Market Structure (May 2001). Available at SSRN: https://ssrn.com/abstract=270314

Bernard Caillaud (Contact Author)

CERAS-ENPC ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 44 58 28 75 (Phone)
+33 1 44 58 28 80 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Place Anatole France
21 Allees de Brienne
F-31042 Toulouse Cedex
France
+33 5 61 12 8642 (Phone)
+33 5 61 12 8637 (Fax)

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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