Pricing Access to a Monopoly Input

25 Pages Posted: 2 Jun 2003

See all articles by David S. Sibley

David S. Sibley

University of Texas at Austin - Department of Economics

Michael J. Doane

Competition Economics LLC

Michael A. Williams

Competition Economics LLC

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2003

Abstract

What price should entrants pay an incumbent monopoly for use of its assets? Courts, legislators, and regulators have at times mandated that incumbent monopolies lease assets required for the production of a retail service to entrants in efforts to increase the competitiveness of retail markets. This paper compares two rules for pricing such monopoly inputs: marginal cost pricing ("MCP") and Generalized Efficient Component Pricing Rule ("GECPR"). The GECPR is not a fixed price, but is a rule that determines the input price from the entrant's retail price. Comparing the retail market equilibrium under MCP and GECPR, the GECPR equals or dominates MCP in terms of allocative efficiency. If the incumbent is less efficient that the entrant, the GECPR also dominates MCP in allocative efficiency. If the incumbent is more efficient than the entrant, however, conditions may exist in which MCP leads to lower production costs than does the MECPR, so that the total surplus may be higher under MCP. The analysis is carried out assuming either Bertrand competition, quantity competition or monopolistic competition between the incumbent and entrant.

Keywords: efficient component pricing rule, TELRIC pricing, marginal cost pricing, monopoly input, essential facilities

JEL Classification: D42, L40, L50, L96

Suggested Citation

Sibley, David S. and Doane, Michael J. and Williams, Michael A., Pricing Access to a Monopoly Input (April 2, 2003). Available at SSRN: https://ssrn.com/abstract=393942 or http://dx.doi.org/10.2139/ssrn.393942

David S. Sibley

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Michael J. Doane

Competition Economics LLC ( email )

2000 Powell Street
Suite 510
Emeryville, CA 94608
United States
510-655-7503 (Phone)

Michael A. Williams (Contact Author)

Competition Economics LLC ( email )

2000 Powell Street
Suite 510
Emeryville, CA 94608
United States

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