(A) study of optimal access pricing in the telecommunications industry

Abstract

Recent researches in the access pricing problem concentrate on the optimality of the well known ECPR (Efficient Component Pricing Rule) and marginal cost pricing such as LRIC (long run incremental cost). Laffont and Tirole (1994) and Armstrong, Doyle and Vickers (1996) investigate this problem with the break-even constraint of the incumbent access provider. They derive an optimal access price as a variant of the Ramsey inverse elasticity rule and proceed to examine its properties under various assumptions. For example, Armstrong, Doyle and Vickers (1996) conclude that the ECPR price is optimal when the final product price of a vertically integrated dominant firm is regulated. Armstrong and Vickers (1998) in their unregulated model find that the optimal access price is marginal cost if demand is linear and no break-even constraint is imposed. These analyses typically assume that the incumbent access provider is a Stackelberg leader in pricing or production decisions. However, in view of the recent regulatory trend that the incumbent, when requested, is obligated to provide its own bottleneck facilities to entrants, it is more reasonable to take the entrant than the incumbent as the one who plays a leader role. In other words, the incumbent`s decision is dependent on the entrant`s access request, which is taken into account by the entrant in making its decision on facility lease. Given this regulatory framework, the present thesis aims to examine under what conditions the ECPR or marginal cost pricing is socially optimal. To do this, we present a simple Stackelberg model of an entry game. The model is differentiated from other related models in some respects. First, it takes the entrant not the incumbent as a Stackelberg leader when they choose their production levels. Second, their model reveals that the incumbent’s capacity constraint is an important factor in deciding the optimality of the LRIC rule or ECPR. We discuss the optimal pricing rule and make some in...