AVERAGE COST BASED ACCESS PRICING AND THE NON- DISCRIMINATION PRINCIPLE: A LEVEL PLAYINGFIELD?

Transcription

1 AVERAGE COST BASED ACCESS PRICING AND THE NON- DISCRIMINATION PRINCIPLE: A LEVEL PLAYINGIELD? KENNETH JELL nd ØYSTEIN OROS Norwegin School of Economics nd Business Administrtion We re grteful to Kåre P. Hgen nd Kurt Jørnsten for vluble discussions. urthermore, we cknowledge the Institute for Reserch in Economics nd Business Administrtion for funding.

2 ABSTRACT Essentil network infrstructure in telecommunictions typiclly exhibit nturl monopoly chrcteristics resulting in significnt mrket power for the opertor. Ex nte regultion is used to ensure rivl downstrem service providers ccess to the network in competition with the verticlly integrted network opertor. Cost orienttion is freuently used for regulting the ccess price. To recover fixed cost, existing rules inevitbly tend to result in n ccess price bsed on verge cost. We compre the effects on mrket euilibrium in duopoly where the firms perceive tht ccess price is bsed on verge cost s opposed to when they consider it exogenous. When ccess price is considered exogenous, the output nd contribution of the verticlly integrted network opertor exceeds tht of its rivl. On the other hnd, when both firms perceive fixed cost to be llocted ccording to trffic volumes, output nd profits re the sme for both verticlly integrted incumbent nd the rivl resulting in non-discrimintion. If the verticlly integrted opertor hs decentrlized decision mking, then there re multiple eulibriums when ccess price is considered exogenous. Welfre will regrdless be reduced reltive to centrlized decision mking. inlly, if the firms consider ccess price s endogenous, then the structure of decision mking mkes no difference. Keywords: regulted industries, telecommunictions, cost orienttion, non-discrimintion.

3 . Introduction In mny regulted industries, like the telecommunictions industry, downstrem competitors re dependent on ccess to n upstrem essentil fcility controlled by verticlly integrted incumbent. Usully the essentil fcility is some lrge infrstructure, like the locl loop in telecommunictions. Ex nte bsed regultion is used to ensure downstrem competitors ccess to the upstrem fcility. or telecommunictions in the EU, this is set forth in the Access Directive (00) which provides Ntionl Regulting Authorities with set of remedies including trnsprency obligtion (Article ), non-discrimintion obligtion (Article 0), n ccounting seprtion obligtion (Article ), n ccess obligtion (Article ), nd price control nd cost ccounting obligtion (Article ) (see ERG, 00). To chieve the first best welfre outcome, ccess price should typiclly eul mrginl cost (see e.g. Lffont nd Tirole, 4). However, given the cost structure of regulted telecommunictions services, this would normlly not led to full recovery of fixed costs. Hence, much of the economic literture deprts for some version of mrginl cost bsed pricing (see Armstrong, 00, for review). or exmple, in the ccess literture, the recovery of fixed costs is typiclly dvocted to tke plce through Rmsey mrkup of mrginl cost. In this cse, fixed costs re llocted bsed on the demnd elsticities of the respective services. More common in prctice, nd lso in the regultion of ccess in telecommunictions, however, is the more rbitrry lloction bsed on service volume. In Norwy, for instnce, the current interprettion of cost orienttion of ccess prices is one of fully distributed cost (DC) where common costs re llocted primrily on the bsis of This is often referred to s one wy ccess, s opposed to two wy ccess (interconnect) where both firms re in position of grnting ccess to their rivl (e.g. both own infrstructure, or hve n instlled bse of customers which other firms my desire ccess to). See Armstrong (00) for n overview.

4 volume. Hence, the ccess price is bsed n verge totl cost rther thn mrginl cost. Although there re severl pproches to cost bsed ccess pricing, ll regultory cost lloction methods re bsed on verge costs, such tht the ccess price is bove the shortrun mrginl cost lso with regultion (Lffont nd Tirole, 000, nd Vogelsng, 00). Of these, DC hs been the most populr (Lffont nd Tirole, 4) nd remins populr despite economists critiue (see e.g. Lffont nd Tirole,, 000) nd the vilbility of more sophisticted methods such s Rmsey pricing (see e.g. Lffont nd Tirole, 4 nd 000) nd the efficient component pricing rule (Bumol,, nd Armstrong, Doyle, nd Vickers ). The conseuences of n exogenous ccess price in excess of mrginl cost in n oligopolistic mrket hve been studied by severl uthors. Dmni () shows tht in homogeneous product Cournot duopoly where one firm is verticlly integrted, n exogenous ccess price exceeding mrginl cost results in the integrted firm dominting the mrket. urther, reduction in the ccess price is unmbiguously beneficil to consumers, nd cuses volumes to become more eul. Welfre effects re mbiguous, but under unit elstic demnd, n increse in ccess price from mrginl cost will increse totl welfre. In lter pper, Bigliser nd DeGrb (00) ssume product differentition l Hotelling () in downstrem duopoly setting two-prt triffs. They show tht llowing the upstrem monopolist to integrte downstrem improves consumer welfre s well s overll welfre reltive to when both downstrem firms re independent. Like in Dmni (), the verticlly integrted firm ttins lrger mrket shre thn its rivl s it sets per-unit price Also referred to s fully llocted cost (AC) or dditive mrkup. or recent discussion of cost concepts in telecommunictions, see Prsons (00). 4

5 eul to the exogenous ccess price, nd not the lower true mrginl cost like the integrted firm. Unlike these previous studies, we sk wht the conseuences re of n endogenous ccess price. In duopoly, it seems resonble to ssume tht firms will relize the impct of own output decisions on n DC-bsed ccess price, i.e. on the shre of fixed costs ech firm will end up covering. However, ssuming tht price nd untity re dependent, this leds to circulrity; the DC-bsed ccess price is dependent on volumes which in turn re dependent the ccess price. 4 Lffont nd Tirole (4) mention tht such n ccess price must be the outcome of dynmic ttônnement whose pth ought to be studied in more detil (p. 7). We do not ttempt to study such pth, but rther ttempt to shed some light on the euilibrium using sttic simultneous-move gme s it is considerbly more usble nd yet my offer vluble insight (Dixit, 85). 5 Secondrily, we re interested in how decentrlized decision mking influences the bove results. Usully when nlyzing the pricing of ccess to bottlenecks, it is ssumed tht decision mking is centrlized (e.g. Armstrong et l., Bumol nd Sidk 4, Bigliser nd Degrb 00, Dmni, Lffont nd Tirole 4 nd 000, Willig 7). However, telecommunictions regultion lso reuires ccess price to be non-discrimintory with ccounting seprtion nd trnsprency used to ensure tht third prty ccess seekers re treted no less fvourbly thn the opertor's internl divisions" (ERG, 0, 0rev, p. 4). Policy mkers thus seem to believe tht these mesures re sufficient to result in decentrlized decision mking where the downstrem incumbent firm tkes the regulted Goel () builds on Dmni () nd shows tht n increse in the exogenous (bove mrginl cost) ccess price cuses reduction in cost-reducing R&D by the integrted firm. 4 A different strnd of literture explores lloction of joint costs ccording to the net-relizble-vlue (NRV) method which lso poses problem of circulrity s NRV depends on the very prices it is ment to determine. Schneider (8) nd Schneider nd Jeroslow (88) solve this simultneity problem ssuming mong other tht price nd untity re independent. 5 Dixit (8) mentions in pssing tht it might be climed tht the myopic djustment process ssumed is no worse thn the ttonnement of competitive models (p. 07). 5

6 ccess price to be its mrginl cost. Indeed, Mott (004) criticizes the EU competition rules nd rgues tht by ensuring trnsprent prices between verticlly relted firms, the regultor solves commitment problem nd enbles the upstrem firm to use trnsfer price strtegiclly. This is nlogous to the strtegic trnsfer pricing literture which lso ssumes decentrlized decision mking (see e.g. Schjelderup nd Sørgrd 7, Alles nd Dtr 8, Nrynn nd Smith 000, nd Göx 000). However, unlike this literture, we ssume tht the trnsfer price is regulted bsed on the cost orienttion principle nd eul to the ccess price. In this pper, we study the effects of cost bsed ccess price which both the regulted firm nd its rivl relize is bsed on their volumes. Contrry to the result of Dmni () nd Bigliser nd DeGrb (00) where n exogenous ccess price exceeding mrginl cost promotes dominnce by the verticlly integrted firm, the euivlent endogenous ccess price results in non-discrimintory euilibrium. The result is robust to whether the integrted firm dopts centrlized or decentrlized decision mking. However, if firms consider ccess price to be exogenous, then decentrlized decision mking results in lower welfre thn centrlized decision mking. Similr to Bigliser nd DeGrb (00), our results thus indicte tht regultors should be cutious bout promoting decentrlized decision mking s opposed to complete verticl integrtion. Some recent ppers hve begun to discuss pricing of ccess to bottlenecks ssuming decentrlized decision mking (jell nd oros 004, oros, Kind nd Sørgrd 004, nd Hgen, Hnsen nd Vgstd 005). oros et l. (004) show tht the incumbent firm cn circumvent the intention of the non-discrimintion principle through the use of mngeril incentives nd indeed mke the verticlly seprted incumbent more ggressive. The resulting euilibrium is symmetric despite identicl ccounting costs downstrem. In similr setting, jell nd oros (004), much like Mott (004), rgue tht the ccess regultion cn serve to solve commitment problem for the incumbent hedurter by mking the trnsfer price observble nd credible. Thus, the hedurter my use it strtegiclly to soften competition by setting trnsfer price which exceeds mrginl cost, nd in certin cses even exceeds the regulted ccess price.

7 . Model A verticlly integrted incumbent provides n upstrem component, network ccess, to its own downstrem subsidiry nd to downstrem rivl. One unit of network ccess is reuired per unit of retil service provided. The inverse demnd for downstrem retil service is given by p Q where Q + is the sum of incumbent nd rivl output respectively. Quntities (nd thus, indirectly the price) re unregulted. The profit functions of the verticlly integrted incumbent nd its rivl re, respectively: π p + w () π (b) p w were w is the regulted ccess price pid by the rivl nd is totl fixed cost of providing network ccess. As we re not specificlly interested in entry issues, we ignore downstrem fixed costs. 7 urthermore, we ssume tht the retil services re symmetricl from customer point of view. This seems resonble since we re looking towrds wht stble euilibrium might look like when the newcomer hs mtured nd reched level of service comprble to tht of the incumbent. As Peitz (005), we rgue tht: If the entrnt stys long enough in the mrket such [consumer utility] symmetries will finlly dispper. (p. 4, sure brckets dded). Similrly, we ssume tht the mrginl cost of providing the retil component is identicl nd normlized to zero. 8 Welfre is tken to be the sum of producer nd consumer surpluses. The structure of the gme is s follows. At stge one the regultor nnounces the ccess price (regime). At stge two the firms simultneously compete in untities to mximize profit. Here we len on Mitchell nd Vogelsng (8) who rgue tht the rivl 7 or thorough discussion of entry in telecommunictions, see Spulber nd Sidk (7). 8 However, the issue of consumer utility or cost symmetries my be very relevnt upon entry or introduction of new services (see e.g. Peitz 005 nd Hnsen 005, respectively). 7

8 nd the integrted incumbent compete in cpcity nd pricing, so tht Cournot pricing is most likely to result. (p. 8). We ssume tht the regultor is intent on chieving cost oriented ccess price. Cost orienttion is interpreted s n verge cost bsed ccess price. Specificlly, the regultor is successful when the fixed network cost is llocted bsed on volume in euilibrium. We consider two different circumstnces (regimes) under in which this cost orienttion cn be chieved; when ccess price is considered exogenous or endogenous. irst the first regime, the regultor sets w w which is perceived s exogenous by the firms. w my for exmple be bsed on the regultor s privte estimtes of volumes, ( ) w / +. ˆ ˆ In the second regime, the regultor nnounces t Stge tht ( w / + ) where the ccess price is bsed on relized output in the second stge. Hence, w becomes endogenous to both firms. Agin, on the second stge the firms compete in untities. We look t these regultory regimes under both centrlized nd decentrlized decision mking.. Centrlized decision mking In this section, we consider fully integrted incumbent, i.e. centrlized decision mking. Exogenous ccess price Tking ccess price w s given, both firms simultneously mximize profit. The first order conditions for the incumbent nd rivl re, respectively: 0 w 0 () Subtrcting the ltter from the former in () we get: 8

9 + w () Hence, the incumbent s output will lwys exceed tht of the rivl for positive ccess price, nd the difference will be strictly incresing in w, s lso shown by Dmni (). The euilibrium in terms of the exogenous ccess price is: + w (4) w + w p π + 5w 5w 4w + 4w π W 8 w w 8 Proposition : Under centrlized decision mking, the output of the integrted incumbent will exceed tht of the rivl when ccess price is exogenous nd greter thn mrginl cost. Price will be strictly incresing nd welfre strictly decresing in the ccess price. This simply confirms the findings by Dmni () nd Bigliser nd DeGrb (00). The intuition behind the result in Proposition is tht the DC bsed ccess price becomes the rivl s mrginl cost which exceeds the mrginl cost of the verticlly integrted firm s it includes fixed costs.

10 If the regultor were to mximize welfre in () by setting w freely without regrd to cost orienttion, it would choose w resulting in price of zero nd only the rivl producing. Proposition : Under imperfect competition, the welfre mximizing ccess price would be below mrginl cost, resulting in the incumbent producing only ccess nd being foreclosed from the retil mrket. The retil price would eul mrginl cost. Mrket power leds to socil loss s n unregulted price will exceed mrginl cost. The intuition is tht the regultor compenstes for the imperfect competition by setting lower ccess price. In prticulr, it sets ccess price below mrginl cost, i.e. negtive ccess price. This subsidized ccess stimultes the rivl s production t the expense of the incumbent, so much so tht the incumbent is foreclosed from the mrket. Retil price euls mrginl cost (zero) in euilibrium. However, this would not be sustinble euilibrium s it results in negtive profit of π ( w ) for the incumbent which both would py the entire fixed cost s well s subisidize the rivl with per unit of ccess. 0 rom (4) we hve tht euilibrium welfre is strictly concve in ccess price nd decresing for w >. Hence, if the regultor mximizes welfre subject to n ccess price no lower thn mrginl cost, w 0, then the optiml ccess price would simply be mrginl cost. Still, the verticlly integrted incumbent would crry the entire burden of the fixed cost, nd might ern negtive profits if the fixed cost is sufficiently lrge ( ) >. Lffont nd Tirole (4) show tht if the rivl s profit is excluded from the welfre function nd elsticities re constnt, then the mrket power of the rivl decreses the optiml ccess price (p. 8). 0 The euilibrium would lso mke the rivl monopolist. However, s there is no subseuent stge, the rivl would not be ble to tke dvntge of its monopoly power. In more dynmic setting, the euilibrium would hve to be interpreted s contestble mrket euilibrium (Bumol et l. 8). Tht my not be totlly unresonble s long s the incumbent remins provider of ccess nd could re-enter the downstrem mrket. 0

11 Rther thn trditionl welfre mximiztion, we ssume tht the regultor is committed to cost orienttion. urthermore, we ssume tht the cost orienttion is interpreted, not s mrginl cost which is often the cse, but s DC where the regultor ttempts to set ccess * * price t Stge such tht in euilibrium t Stge we get w ( + ). We do not nlyze dynmic pth to such n euilibrium, which Lffont nd Tirole (4) cll for, but rther sk wht would chrcterize such n euilibrium in simple Cournot-Nsh setting. Inserting w ( + ) into the euilibrium untities in (4), nd solving with respect to untities, we get the following two solutions: + where < 0 0, (5) + where 0 0, (5b) 4 However, s (5) violtes the condition tht output must be non-negtive, the only remining solution is (5b). rom (5b) we note tht solution is only possible if fixed cost is sufficiently smll, specificlly 4. Substituting (5b) into (4) gives us the following remining euilibrium vlues where n DC ccess price is chieved while the firms consider ccess price exogenous:

12 W p w C π π () Endogenous ccess price Next, we turn to the cse where the regultor nnounces tht ( ) w + t stge. Hence, the ccess price is endogenous to the firms when they compete t stge. Rewriting the firms profit functions in () nd (b) in terms of the now endogenous ccess price, we get: ( ) i j i i j i i + π where,, j i nd (7) j i Note tht the regultory regime hs mde the fixed cost vrible to the firms in symmetric mnner; ech firm is llocted shre of fixed cost corresponding to its mrket shre. Due to this symmetry, the two firms will choose identicl outputs in euilibrium despite tht the ccess price t fce vlue still represents revenue source to the integrted incumbent nd cost to its rivl. This leds to two possible output levels which stisfy the regultion. + if 0,, Ø otherwise (8) if 0,, Ø otherwise (8b)

13 However, only the high volume lterntive, (8), stisfies the second order conditions for profit mximiztion. This in turn yields the following remining euilibrium vlues: w p π π W () Compring the euilibrium in () with the previous euilibrium in () where ccess price lso euls DC, but where the firms tke w s given, revels tht they result in the sme ccess price, retil price, nd welfre. However, in the former euilibrium, the integrted incumbent lwys produces more thn its rivl, wheres in the ltter the firms untities (nd profits) re identicl. In other words, when the firms consider the cost oriented ccess price to be endogenous, the result is trnsfer of mrket shre nd revenues from the incumbent to the rivl. It lso results in symmetric euilibrium nd s such the one might rgue tht the cost orienttion hs non-discrimintion s its outcome. Proposition : When the incumbent is fully integrted, i.e. under centrlized decision mking, nd the firms perceive the cost orienttion bsed on DC s endogenous, then the outcome is one of non-discrimintion. This result is similr to two-wy ccess result by Economides et l. (). Investigting the conseuences of three different interconnect regultions reciprocity of The second order condition for firm i is stisfied if ( i j ) j < + for i, j, nd i j this implies <. It cn be shown tht for (8) this trnsltes to ( ) 8 i < 8 5, nd for (8b) to < 0.. Given symmetry,

14 termintion chrges, imputtion nd unbundling they find tht ll three tend to neutrlize dominnce nd profit differences in network duopoly. The result lso echoes more fmilir property tht price nd totl output in Cournot euilibrium depends on the sum, but not the distribution of mrginl costs. Bergstrom nd Vrin (85) shows how this property formlly holds for constnt mrginl costs. Although mrginl cost is declining in our endogenous regime, the sum of mrginl costs in euilibrium is eul to tht in the exogenous regime. In the ltter, mrginl cost of the verticlly integrted firm is zero, wheres the constnt, exogenous mrginl cost of the rivl is w Q in euilibrium. In the endogenous regime, tking the derivtive of the lst term in (7) nd summing over the firms, we hve tht the sum of mrginl costs is i. i Q Q Q 4. Decentrlized decision mking As discussed in the Introduction, the cost oriented ccess regultion often includes dditionl regultory mesures to ensure non-discrimintion, such s trnsprency nd ccounting seprtion. Mott (004) nd jell nd oros (004) suggest tht this regultion enbles the integrted firm to decentrlize decision mking. In this section, we ssume tht the verticlly integrted firm reorgnizes into upstrem hedurters (HQ) providing network ccess nd downstrem subsidiry providing service in competition with the rivl. Simultneously, decision mking is decentrlized. Bsed on homogeneity downstrem, the non-discrimintion obligtion implies tht the HQ must offer ccess on identicl terms to An imputtion rule restricts termintion fees to be no lrger thn the implicit price for termintion sold s prt of internl clls (Economides et l. ). 4

15 both downstrem firms. The downstrem subsidiry mximizes profit while treting w s its mrginl cost just like the rivl does. The structure of the gme is now expnded by one stge. irst, the regultor nnounces the ccess price (regime), second the HQ dopts the regime, nd finlly, the downstrem subsidiry nd rivl compete in untities. Note tht unlike in jell nd oros (004) where trnsfer price my devite from the ccess price nd is used strtegiclly, the role of the HQ is trivil in our cse s it simply psses on the ccess price (regime) to the downstrem firms. As such, the setting more closely resembles tht of Bigliser nd DeGrb (00). Given identicl services nd costs downstrem, we get symmetricl downstrem profit functions: i ( i j ) i wi π where i, j, nd i j (0) Totl profit of the verticlly integrted firm is π p + w. I or resons which will become obvious, we chnge the order from the previous section nd first consider the endogenous ccess price regime, then the exogenous ccess price regime. Endogenous ccess price As in the previous section, the regultor nnounces t Stge tht the ccess price regime is w, i.e. wht we hve clled n endogenous ccess price. This ccess price regime is + simply pssed on by the HQ of the incumbent firm to its downstrem subsidiry nd the downstrem rivl. The HQ profit is zero under this regultion, nd hence the downstrem subsidiry fces the totl profit function of the verticlly integrted firm. Thus, the outcome will be the sme s under centrlized decision mking. 5

16 Exogenous ccess price Next, we consider the cse where ccess price is perceived s exogenous by the firms, w w, nd solve by bckwrd induction. Mximizing (0) with respect to untity, we get following symmetricl euilibrium: w + w p + 4w 5w π I () w + w π π 4 w w W As in the previous section, we next solve for the cse where the regultor chieves cost oriented ccess price in euilibrium. In this cse, the profit of the HQ will be zero nd the totl profit of the integrted firm is thus eul to tht of its downstrem subsidiry. Solving ( ) w + nd () simultneously for w, we get: + w if 0,, Ø otherwise () w if 0,, Ø otherwise (b) Compring () with () we find tht the rnge of fixed costs for which n euilibrium solution exists is nrrower under decentrlized decision mking, [ 0, ] centrlized decision mking, [ 0, 4] proposition., thn under. This cn be summrized in the following

17 Proposition 4: Decentrlized decision mking reduces the likelihood tht n euilibrium exists for n DC bsed ccess price. Inserting () nd (b) bck into () we get the following two possible euilibriums, respectively. 8 W p + π π 8 W p π π (,b) rom () we cn show tht welfre is strictly higher in the high volume lterntive, (b), for 0,. The euilibriums re identicl for. Hence, the high volume lterntive will be preferred by the regultor. urthermore, profits re lso higher in the high volume lterntive, such tht the firms would lso prefer this lterntive. However, both euilibriums re sustinble. As such, bsent ny explntion for the dynmic pth towrds the euilibrium, either euilibrium might be eully likely, lthough one is significntly poorer from the perspective of ll prties regultor, firms nd consumers. Proposition 5: Decentrlized decision mking results in two DC-bsed ccess price euilibriums; one yielding high nd one yielding low ccess price. The low ccess price euilibrium results in higher welfre, higher profits, nd lower prices nd would hence be preferred by regultor, firms nd consumers. 7

18 Next, we investigte the impct of decentrlized decision mking, given tht ccess price is perceived s exogenous by the firms. Compring the low ccess price euilibrium under decentrlized decision mking (b) with tht under centrlized decision mking leds to the following proposition: Proposition : Decentrlized decision mking results in higher DC-bsed ccess price, higher retil price nd lower welfre. Proof: Subtrcting ccess price under decentrlized decision mking, (b), from tht under centrlized decision mking, (), we get: ( + ) which is zero for ( ) > 0 0, nd for. urthermore, the derivtive of the difference with respect to is > 0 0,. Proof for price nd welfre cn be shown nlogously. Propositions 4 nd re cution tht decentrlized decision mking my ctully reduce welfre. Regultors tht ttempt to put distnce between the monopoly nd competitive ctivities by enforcing decentrlized decision mking on verticlly integrted firms, my thus indvertently reduce welfre. This supports erlier cutions bout possible negtive conseuences from decentrlized decision mking put forth by Bigliser nd DeGrb (00) nd jell nd oros (004). 8

19 5. Conclusion In this pper, we discuss the possible euilibrium effects of n ccess price bsed on fully distributed cost (DC) in telecommunictions duopoly. By DC we men the simplest form of lloction of common fixed cost bsed on untity. This seems to be in line with prctice which typiclly implies some verge cost bsed ccess (Lffont nd Tirole, 000, nd Vogelsng, 00). urthermore, we discuss the effects of decentrlized decision mking. We find tht under centrlized decision mking, the euilibrium price nd welfre will be unffected by whether the firms perceive the ccess price s exogenous (nd eul to DC) or they perceive it s endogenous in tht their own untity influences ccess price. However, when the firms perceive it s exogenous, the verticlly integrted firm will lwys be dominnt (hve greter mrket shre). On the other hnd, when the firms perceive tht n increse output lso increses their shre of the common fixed costs, the result is one of eul mrket shres. Hence, our results indicte tht, ll else being eul, DC will bring bout non-discrimintory euilibrium if the firms perceive ccess price s endogenous. We lso study the impct of decentrlized decision mking with n DC bsed ccess price. Recent literture suggests tht the regultory push towrds ccounting seprtion nd decentrlized decision mking my hve dverse effects on consumer welfre (Bigliser nd DeGrb 00, jell nd oros 004). We find tht decentrlized decision mking hs no impct when firms consider ccess price to be endogenous. However, if they perceive it s exogenous, then decentrlized decision mking reduces the scope for n euilibrium, nd lso results in higher ccess price, higher retil price, nd lower welfre. Some cvets re in order. Our results re bsed on simple Cournot setting. The influence of price competition thus remins unexplored. urther, Lffont nd Tirole s (4) cll for study of the dynmic pth towrds euilibrium is not ddressed here.

20 . References The Access Directive. 00. Directive 00//EC on ccess to, interconnection of, electronic communictions networks nd services. Alles, M. nd S. Dtr 8. Strtegic trnsfer pricing, Mngement Science, 44, Armstrong, M. 00. The theory of ccess pricing nd interconnection, in Hndbook of Telecommunictions Economics, M. Cve, S. Mjumdr, nd I. Vogelsng (eds.), Amsterdm, Elsevier Publishers. Armstrong, M., C. Doyle nd J.Vickers (), The ccess pricing problem: A synthesis, The Journl of Industril Economics, pp Bumol, W.J., (), Deregultion nd Residul regultion of locl telephone service, AEI Studies in Telecommunictions Deregultion (Americn Enterprise Institute for Public Policy Reserch, New York University, New York). Bumol, W.J., Pnzr, J.C. og Willig, R.D. (8). Contestble mrkets nd the theory of industry structure. Hrcourt Brce Jovnovich, New York. Bumol, W. J. nd J. G. Sidk (4), The pricing of inputs sold to competitors, Yle Journl of Regultion, v., 7-0. Bergstrom, T.C. nd H.R. Vrin (85), When Are Nsh Euilibri Independent of the Distribution of Agents Chrcteristics? Review of Economic Studies, 5:7, Bigliser, G. nd P. DeGrb. 00. Downstrem integrtion by bottleneck input supplier whose regulted wholesle prices re bove costs, RAND Journl of Economics, Vol., No., 0-5. Dmni, D. () The Scope for Collusion nd Competition in Regulted Verticlly Integrted Industry, Bulletin of Economic Reserch, 48:, Dixit, A. (8). Comprtive Sttics for Oligopoly, Interntionl Economic Review, Vol. 7, No.,

21 Economides, N, G. Lopomo nd G. Woroch (). Regultory Pricing Rules to Neutrlize Network Dominnce, Industril & Corporte Chnge, Vol. 5, Issue 4, 0-0. ERG, 00. "ERG Common Position on the pproch to Approprite remedies in the new regultory frmework". jell, K. nd Ø. oros, 005, Access price regultion fcilittes strtegic trnsfer pricing, working pper. oros, Ø., H.J. Kind nd L. Sørgrd, 004. Mngeril incentives nd ccess price regultion, working pper. Goel, R.K. (). R&D nd Output in Regulted Verticlly Integrted Oligopoly, Bulletin of Economic Reserch, 5:4, Göx, R Strtegic trnsfer pricing, bsorption costing, nd observbility, Mngement Accounting Reserch,, Hgen, KP., B. Hnsen nd S. Vgstd Synergies nd non-discrimintory ccess pricing, working pper. Hnsen, B Network competition when costs re heterogeneous. Working pper. Husmn, J "Cellulr G Brodbnd nd Wii", in R. Cooper nd G. Mdden (eds.) rontiers of Brodbnd, Electronic nd Mobile Commerce, Physic-Verlg, New York. Hotelling, H. (). Stbility in Competition, Economic Journl,, Lffont, J.J., nd J. Tirole (4), Access pricing nd competition, The Europen Economic Review, 8 (4), pp Lffont, J.J. nd J. Tirole (), Creting Competition Through Interconnection: Theory nd Prctice, Journl of Regultory Economics, 0:7-5. Lffont, J.J. nd J. Tirole Competition in Telecommuniction, The MIT Press.

22 Mitchell, B.M. nd I. Vogelsng, (8). Mrkup pricing for interconnection: conceptul frmework. In D. Gbel nd D.. Weimn (eds.), Opening Networks to Competition The regultion nd Pricing of Access, Kluwer Acdemic Publishers, Msschusetts. Mott, M Competition Policy: Theory nd Prctice, Cmbridge University Press. Nrynn, VG nd M Smith 000. "Impct of Competition nd Txes on Responsibility Center Orgniztion nd Trnsfer Prices," Contemporry Accounting Reserch Vol. 7 No. (ll 000) pp Prsons, S.G. (00). Lffont nd Tirole s Competition in Telecommnictions: A View rom the US, Interntionl Journl of the Economics of Business, Vol., No., 4-4. Rmsey,.P. 7. A Contribution to the Theory of Txtion, The Economic Journl, vol. 7, no. 45, 47-. Schjelderup, G. nd L. Sørgrd 7. Trnsfer Pricing s Strtegic Device for Decentrlized Multintionls, Interntionl Tx nd Public innce, 4, Schneider, A. 8. Simultneous Determintion of Cost Alloctions nd Cost-Plus Prices for Joint Products, Journl of Business innce & Accounting, (), Schneider, A. And R.G. Jeroslow, 88. Joint Product Cost Alloction in the Context of Cost-Plus Pricing Determintions with Non-Uniform Mrkups, Decision Sciences, vol., Spulber, D. nd J.G. Sidk (7). Network Access Pricing nd Deregultion, Industril nd Corporte Chnge, Vol., No. 4, Vogelsng, I. 00. Price regultion of ccess to telecommunictions networks, Journl of Economic Literture, XLI, Willig, R.D. (7), The theory of ccess pricing, in H.M. Trebing (ed), Issues in Public Utility Regultion, Michign Stte University Public Utility Pper.

23