Strategic Choice of Financing Systems in Regulated and Interconnected Industries

30 Pages Posted: 20 Jun 2003  

Anna Bassanini

University of Rome I - Department of Computer and Systems Science

Jérôme Pouyet

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS); National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); Centre for Economic Policy Research (CEPR)

Date Written: May 2003

Abstract

The growing importance of inter-network exchanges in infrastructure-based utilities influences regulatory choices and access-pricing for downstream services using the networks. We analyse this problem in a setting where the infrastructure managers of two bordering countries are in charge of pricing the access to their networks for downstream transport firms that provide international services. Network costs can be financed either through a subsidy or solely through user charges. Access charges are affected by the incomplete internalization of consumers' surplus and infrastructure costs. Because of these distortions, it turns out that in a non-cooperative setting the second-best outcome consists in the simultaneous adoption of the no-subsidy system. Either this outcome is not an equilibrium, however, or the two countries could end up by choosing either the subsidy or the no-subsidy system, depending on the magnitude of the fixed costs of the networks and the characteristics of the final demand for services; moreover, in the latter case, the second-best outcome is not a stable equilibrium. Other properties of these equilibria are studied, as well as the impact of supra-national policies aimed at alleviating the excessive pricing of access on international services. The coordination problems deriving from the existence of different equilibria can, sometimes, be partially solved by separating the choice of a regulatory mode from the access pricing stage, thereby allowing the infrastructure managers to commit to use a specific financing system before setting the access price.

Keywords: Ramsey pricing, interconnected networks, infrastructure financing

JEL Classification: L51

Suggested Citation

Bassanini, Anna and Pouyet, Jérôme, Strategic Choice of Financing Systems in Regulated and Interconnected Industries (May 2003). CEPR Discussion Paper No. 3888. Available at SSRN: https://ssrn.com/abstract=418663

Anna Bassanini

University of Rome I - Department of Computer and Systems Science ( email )

Via Buonarroti 12
00185 Roma
Italy
+39 06 4829 9214 (Phone)
+39 06 2332 17480 (Fax)

HOME PAGE: http://www.dis.uniroma1.it/~tiom/Bassanini/Bassanini.htm

Jerome Pouyet (Contact Author)

Ecole Nationale des Ponts et Chaussées (ENPC) - Centre d'Enseignement et de Recherche en Analyse Socio-Economique (CERAS) ( email )

28, rue des Saints-Peres
75007 Paris
France
+33 1 4458 2870 (Phone)
+33 1 4458 2880 (Fax)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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