Paul A Grout and In-Uck Park
This paper addresses the issue of how regulators can use access pricing to promote entry by innovatory firms in the presence of essential facilities. The entrants have lower costs that spillover to firms in the market but the regulator is not able to distinguish which entrants have low costs and which do not. In a dynamic framework with entrants of differing quality technology spillovers have two effects. One is positive in that the incumbent can copy the cheaper technology of the entrant. This reduces cost in the industry and offsets the fixed entry cost associated with entry. The other is a negative effect in that the ability to use access pricing to deter entry of bad quality entrants is reduced. A low quality firm can free ride on the quality of a good entrant since it is protected from the consequences of its high costs and poor technology if a good firm has already entered or may be about to enter. The greater the spillover the greater desire to attract good entrants but also the harder it is the penalise poor quality entrants.
This paper considers this dilemma and the consequences for public policy. The question we address is whether the lack of full information encourages the regulator to sustain entry enhancing policies for longer or whether the regulator makes entry harder. Generally, we show that the incentives are for the regulator to limit entry enhancement in the face of incomplete information rather than be more open in the face of the inability to determine the good firms from the bad ones. We also show that for certain configurations the good firm has an incentive to raise its costs, i.e., become a less good competitor.
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