Efficient access pricing and endogenous market structure

We investigate how a regulatory mechanism can influence the nature of competition in a network industry. In the downstream market, the seller of a differentiated retail product competes with an incumbent firm. The incumbent firm is also the owner of the essential input. The regulator may or may not observe the cost of the entrant. To maximize social welfare the regulator specifies the access charge that the entrant must pay to the incumbent, and the retail prices. The optimal access charge is a uniform price that respects the criteria of transparency and non-discrimination that are imposed by the competition and regulation directives in most countries. We derive new formulas for retail and access prices adhering to the traditional Ramsey rule. Since the competing firm takes the decision to enter following the choice of the regulatory regime, the nature of the retail market competition is endogenous