Endogenous average cost based access pricing

Abstract

We consider an industry where a downstream competitor requires access to an upstream facility controlled by a vertically integrated and regulated incumbent. The literature on access pricing assumes the access price to be exogenously fixed ex-ante. We analyze an endogenous average cost based access pricing rule, where both firms realize the interdependence among their quantities and the regulated access price. Endogenous access pricing neutralizes the artificial cost advantage enjoyed by the incumbent firm and results in equal or higher consumer surplus. If the entrant is more efficient than the incumbent, then the welfare under endogenous access pricing is also higher.