Access price regulation facilitates strategic transfer pricing

Abstract

Access price regulation is used in telecommunications to prevent that a vertically integrated firm, that controls an essential input, raises the rivals` costs. When the authorities remove the access price as a strategic tool, they at the same time make it optimal for the vertically integrated firm to reorganize from centralized pricing to decentralized pricing in order to use the transfer price as an alternative strategic device. To implement access price regulation, authorities use accounting separation and transparent transfer prices as complementary remedies. However, these remedies facilitate the transfer price as a strategic device used to soften competition. Consequently, the regulation may protect the rivals (and the incumbent) from competition to the detriment of consumers.