“Quality upgrades and Bypass under Mandatory Access”

João Vareda

Resumo WP n.º 39:

We analyze the interaction between the incumbent’s incentive to upgrade its network and the entrant’s to build a bypass network when the regulator sets a two-part access tariff to the incumbent’s network. We conclude that the entrant’s investment in a bypass network is delayed with the incumbent’s investment, which has a positive effect on the incumbent’s incentive to upgrade quality. We also show that the access tariff has an ambiguous impact on the investments of both  rms. Finally, we find that a regulator cannot achieve a first-best solution either when he sets a constant tariff ex-ante or ex-post. Thus, we propose an access tariff structure increasing in time and increasing (decreasing) in quality if the business-stealing effect of the quality upgrades investment is strong (weak), that leads to first-best and avoids any dynamic consistency problem.

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